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osada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2016,...

osada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2016, for $840,000. The subsidiary’s total fair value was assessed at $1,200,000 although its book value on that date was $1,130,000. The $70,000 fair value in excess of Sabathia’s book value was assigned to a patent with a five-year remaining life.

On January 1, 2018, Posada reported a $1,085,000 equity method balance in the Investment in Sabathia Company account. On October 1, 2018, Posada sells 1,000 shares of the investment for $191,000. During 2018, Sabathia reported net income of $120,000 and declared dividends of $40,000. These amounts are assumed to have occurred evenly throughout the year.

How should Posada report the 2018 income that accrued to the 1,000 shares prior to their sale? (Do not round your intermediate calculations.)

What is the effect on Posada’s financial statements from this sale of 1,000 shares? (Do not round your intermediate calculations.)

Solutions

Expert Solution

1. Amortization for the patents = $70000/5 = $14,000

Net income after amortization = $120000 - 14000 = $106,000

Posada increase to equity on October 1st, 2018 as the amount earned at that time multiple by the percent owned = ($106000 / 12) x 9 x 0.70 = $55,650

Percentage of share sold = 1000/7000 = 0.1429

The increase to equity of shares sold is = $55650 x 0.1429 = $7,950. Company P will record the accrual as equity income in shares sold.

2. Decrease from dividend = ($40000 / 12) x 9 x 0.70 = $21,000

Book value of investment = $1085000+56650-21000 = $1,119,650

Book value of shares = $1,119,650 x 0.1429 = $159,950

Company P will record the sale of the shares as a ($191000 - $159950) = $31,050 increase to additional paid in capital.

ekkarill92 answered 2 years ago
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