Question

On January 1, 2017, Alison, Inc., paid $83,600 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $279,500 and liabilities of $118,500. A patent held by Holister having a $6,800 book value was actually worth $42,800. 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 $33,500 and declared and paid dividends of $11,000. In 2018, it had income of $68,000 and dividends of $16,000. During 2018, the fair value of Allison’s investment in Holister had risen from $92,900 to $103,200.

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) Using Equity Method : As Per International Accounting Standard 28, Investment in Associates is recognized using equity method which is as follows :

Calculation of Fair Value of Net Assets of Investee = 279500-118500 -6800(book value) + 42800(Patent Worth)

                                                                                 = 197000

   Investor Share in Net Assets = 40% of 197000 = 78800

Calculation of Goodwill = Consideration Paid- Investor Share in Net Assets

                                   = 83600- 78800 = 4800.

So initial recognition would be:

Investment in Associates Dr. 78800

Goodwill                         Dr   4800

      To Bank                              83600

Recognition on 31 Dec,2018

Initial Recognition                  78800

+ 2017 Income Share            13400 (40% of 33500)

-2017 Dividend Share              4400 (40% of 11000)

+2018 Income Share              27200 (40% of 68000)

-2018 Dividend Share               6400 (40% of 16000)

Carrying Value on 31 Dec          108600

(B) Using Fair Value Method :

Initial Recognition would be at full value i.e 83600

Thereafter, book value will be adjusted for fair value changes.

Carrying Amount on 1 Jan , 2017	83600
IN 2017(92900-83600)	9300
IN 2018(103200-92900)	10300
Carrying Amount on 31 Dec,2018	103200

In 2018, Amount that would be credited to Net income under fair value method would be :

Dividend received              6400

Fair Value increase    10300(103200-92900)

                Total    16700                                                                          

Journal Entries Would be:

Bank Dr       6400

   To Dividend Revenue Income       6400

Investment   Dr.         10300

To Unrealized Gains            10300