Question

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.)

Answer 1

(a) The acquisition price of the shares purchased on januray 1st 2016 is equal to the fair value of shares .The accrual from the sale of shares will come from increase in the equity of the share value in 2018 up unitil the acquision.The increase to equity on October 1st 2018 is company's interest of net income minus amortisation

The amortisation can be calculated as the $70,000 assigned to the patent divided by the years remaining .Calculate the amortisation of patent :

$70,000 / 5

= $14,000

Calculate the difference in the net income & amortisation:

$120,000 - $14,000 = $ 106,000

The increase to equity for shares on october 1st 2016, will be for only the time up until the acquision. Nine months of the year have passed when October 1st arrives . Revenues were made evenly throughout the year, so the increase to equity wll be calculated as below. this will allow a proper account for the specific time of equity increase.Calculate company's increase to equity on october 1 st 2016 as the maount earned at that time multiplied by the percentage owned:

($106,000 / 12) * 9 * 0.70 =$ 55,650

The percentage of shares sold wil be calculated as:

(1,000 / 7,000) = 0.1429

Calculate the amount of equity increase to the 1,000 shares as the equity increase times percentage sold:

$55,650 * 0.1429 = $7,950

(b) Company will record the difference in sale price and book value as additional paid - in capital on the financial statement. The acquisition method denotes that stock transactions occur in the equity when the seller maintaines a controlling interest .

The bookvalue of shares sold is the percentage of shares sold times the investment balance. The investment balance can be caculated as the balance on january 1st 2016 plus the increases and decreases to equity uptill the sale date . The increase and decrease from net income and amortisationon october 1, 2016 have been calculated as $56,650. The decrease from dividends need s to be calculated as:

($40,000/12) * 9 * 0.70 = $21,000

Calculate the book value of investment as:

$1,085,000 + $56,650 - $21,000 = $ 1,119,650

Calculate the book value of shares as:

$1,119,650 * 0.1429 = $159,950

Calculate the difference inthe sale price and the book value of the shares sold :

$ 191,000 - $ 159,950 = $ 31,050

Company willl also record the saleof shares as a $31,050 increase to additional paid up capital