In: Accounting
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?
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 |