On January 1, 2017, Alison, Inc., paid $70,800 for a 40 percent interest in Holister Corporation’s...

On January 1, 2017, Alison, Inc., paid $70,800 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $235,000 and liabilities of $95,000. A patent held by Holister having a $8,900 book value was actually worth $25,400. 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 $45,700 and declared and paid dividends of $15,000. In 2018, it had income of $53,700 and dividends of $20,000. During 2018, the fair value of Allison’s investment in Holister had risen from $84,080 to $88,960.

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

b. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2018?

Solutions

Expert Solution

Calculation of Balance should appear in the Investment in Holister account Using Equity Method

Acquisition price	70,800	Working Notes
Book value-assets - liabilities	-56000	40% * (235000-95000)
Excess payment	14,800
Value of patent in excess of book value	-6600	40% * (25,400 - 8,900)
Goodwill	8,200
Patent (6600/6)	1100
Goodwill	0
Annual amortization	1100

Acquisition price	70,800
Basic equity accrual 2017	18280	45700*40%
Dividends—2017	-6000	15000*40%
Annual amortization	-1100
Investment in Holister, 12/31/17	81,980
Basic equity accrual 2018	21480	53700*40%
Dividends—2018	-8000	20000*40%
Annual amortization	-1100
Investment in Holister, 12/31/18	$94,360

B. Calculation of income from the investment in Holister should be reported for 2018 using fair-value accounting

Dividend income	8000	20000*40%
Increase in fair value	4880	88960-84080
Investment income under fair value option 2018	$12880

ekkarill92 answered 1 year ago

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