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Equity Method Accounting, Subsequent Years PL Communications acquired all of the stock of SJ Telecom on...

Equity Method Accounting, Subsequent Years

PL Communications acquired all of the stock of SJ Telecom on January 1, 2019. It is now December 31, 2021, three years later. PL Communications uses the complete equity method to report its investment in SJ Telecom on its own books. Both companies have December 31 year-ends. The following information is available:

• PL Communications paid $400 million to acquire SJ Telecom.

• At the date of acquisition, the book values of all of SJ Telecom’s reported assets and liabilities approximated fair value. Previously unreported limited-lived identifiable intangibles with a fair value of $20 million were recognized. These intangibles had an estimated life of 5 years, straight-line. There have been no impairment losses.

• Total goodwill impairment losses for 2019 and 2020 were $1 million. There is no goodwill impairment for 2021.

• The change in SJ Telecom’s retained earnings from January 1, 2019, to December 31, 2020, was $12 million.

• In 2021, SJ Telecom reported net income of $6,500,000 and declared and paid dividends of $1,500,000.

• SJ Telecom does not report any other comprehensive income.

Required

Enter both answers in millions (using decimal places, if applicable).

a. Calculate equity in net income for 2021, reported on the books of PL Communications.

$_____ million

b. Calculate the December 31, 2021 balance in Investment in SJ Telecom, reported on the books of PL Communications.

$_____ million

Solutions

Expert Solution

The "equity method" is a method of accounting whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor's share of net assets of the investee.

Solution to the question (a)

Equity in net income for 2021

Reported net income $6,500,000

Less: Amortization cost on Unidentified Intangibles $4,000,000

Fair Value $20,000,000

No. of years to be amortized 5 yrs

Amortization Cost per year till 31.12.2023 ($20,000,000/5)

Net Income $2,500,000 or $2.5 Million

Solution to the question (b)

Balance in Investment

Cost of Investments $400,000,000

Retained Earning from January 1, 2019, to December 31, 2020 $12,000,000

(deducting Amortization cost of Intangibles for 2019 & 2020) $ 8,000,000 $ 4,000,000

Equity in net income for 2021 (as calculated in Solution a above) $2,500,000

Less: Dividend received $ 1,500,000

Balance in Investment $405,000,000 or $ 405 Million

Note 1: Assuming that amortization cost on Unidentified Intangibles were not taken into consideration while calculating Net Income or retained earning. Accordingly, it was considered for calculation.

ekkarill92 answered 4 months ago

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