Question

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?

Answer 1

a.

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