Question

On January 1, 2017, Alison, Inc., paid $60,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $200,000 and liabilities of $75,000. A patent held by Holister having a $5,000 book value was actually worth $20,000. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2017, Holister earned income of $30,000 and declared and paid dividends of $10,000. In 2018, it had income of $50,000 and dividends of $15,000. During 2018, the fair value of Allison’s investment in Holister had risen from $68,000 to $75,000.

Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2018?

Answer 1

An equity security can be defined as the stocks owned by someone of another company. This will give the stockholder opportunity a power to influence the operational and management decision of the company. Based on the number of shares, the accounting method is decided for the same. In equity method, the profits earned by the investments of stockholders in other companies are determined by the company. Companies use the equity method to record the investments as soon as they make the investments.