Question

On January 1, 2013, an investor purchases 18,000 common shares of an investee at $12 (cash) per share. The shares represent 20% ownership in the investee. The investee shares are not considered "marketable" because they do not trade on an active exchange. On January 1, 2013, the book value of the investee's assets and liabilities equals $900,000 and $200,000, respectively. On that date, the appraised fair values of the investee's identifiable net assets approximated the recorded book values, except for a customer list. On January 1, 2013, the customer list had a recorded book value of $0, an estimated fair value equal to $50,000 and a 5 year remaining useful life. During the year ended December 31, 2013, the investee company reported net income equal to $42,000 and dividends equal to $20,000.

Noncontrolling investment accounting (price different from book value)
Assume the investor can exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2013.

Answer 1

Particulars	Amount ($)	Amount ($)
Investment cost (18000 x 12)		216,000.00
Net asset as on the date of acquisition of common shares
Book value of assets	900,000.00
Add: Fair value of customer list	50,000.00
Total assets value	950,000.00
Less: Book value of liabilities	200,000.00
Net asset as on the date of acquisition of common shares		750,000.00
Share of Investor (750000 x 20%)		150,000.00
Goodwill arise as on the date of acquisition of investment (216000 - 150000)	66,000.00
Investment in the investee will show the following balance
	Amount ($)	Amount ($)
Investment in common shares (216000 -66000)	150,000.00
Add: Goodwill	66,000.00
		216,000.00

The amount of dividend approximate to 20% would be recognized in the profit and loss account and will not impact the carrying value of the investment investee account.