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On January 1, 2020, Alison, Inc., paid $91,200 for a 40 percent interest in Holister Corporation’s...

On January 1, 2020, Alison, Inc., paid $91,200 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $268,500 and liabilities of $98,500. A patent held by Holister having a $9,500 book value was actually worth $36,500. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2020, Holister earned income of $42,200 and declared and paid dividends of $14,000. In 2021, it had income of $62,750 and dividends of $19,000. During 2021, the fair value of Allison’s investment in Holister had risen from $104,280 to $108,880.

A. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2021?

B. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2021?

Solutions

Expert Solution

Part A

Assets in investee company             268,500
Liabilities in investee company               98,500
Net Assets in investee company             170,000
Fair value of investee company (91200/40%)             228,000
Less: Net Assets in investee company             170,000
Total difference               58,000
Less: excess cost associated with patent (36500-9500)               27,000
Further excess cost associated with goodwill               31,000
Excess cost associated with patent               27,000
Divided by: Remaining life in years                          6
Total amount of amortization                  4,500
Purchase of Investment $          91,200
Dividend received 2020 (14000*40%) $          (5,600)
Share in net income 2020 (42200*40%) $          16,880
Amortization of patent (4500*40%) $          (1,800)
Dividend received 2021 (19000*40%) $          (7,600)
Share in net income 2020 (62750*40%) $          25,100
Amortization of patent (4500*40%) $          (1,800)
Book value of 40% interest $        116,380
Alison, Inc
Partial balance sheet
December 31, 2021
Assets
Non-Current investment (using equity method)
Investment in Holister             116,380

Part B

Fair value at the end of the year             108,880
Less: Fair value at the beginning of the year             104,280
Incresae in fair value                  4,600
Alison, Inc
Partial income statement
December 31, 2021
Using fair-value accounting
Dividend income (19000*40%)                  7,600
Unrealised gain (part of net income)                  4,600
Income from the investment in Holister               12,200

ekkarill92 answered 1 year ago
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