On January 1, 2017, Alison, Inc., paid $83,400 for a 40 percent interest in Holi

Question

On January 1, 2017, Alison, Inc., paid $83,400 for a 40 percent interest in Holister Corporation's common stock. This investee had assets with a book value of $267000 and liabilities of $100,000. A patent held by Holister having a $12,500 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 2017, Holister earned income of $42,500 and declared and paid dividends of $14,000. In 2018, it had income of $72,700 and dividends of $19,000. During 2018, the fair value of Allison's investment in Holister had risen from $94,400 to $105,880. 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? Investment in Holister Investment income

Explanation / Answer

a.

Calculate patent amortization to be recorded by Alison Inc. for each year as follows:

Value of patent in excess of book value = $36,500 - $12,500 = $24,000

Alison Inc.'s share in Holister Corporation = 40%

Remaining life of the patent = 6 years

Patent amortization to be recorded by Alison inc., for each year = $24,000 x 40% x 1/6 = $1,600

Calculate the balance of Investment in Holister account as of December 31, 2018 using equity method as follows:

Thus, balance in the investment in Holister account as of December 31, 2018 will be $113,080.

b.

Calculate the income from investment in Holister to be reporter for 2018 using fair-value accounting as follows:

Thus, investment income for 2018 under fair value accounting will be $19,080.

Acquisition price 83400 Add: Alison's share in Holister's income for 2017 ($42500 x 40%) 17000 Less: Dividend received by Alison from Holister in 2017 ($14,000 x 40%) -5600 Less: Patent amortization for 2017 -1600 Balance in Investment in Holister account on December 31, 2017 93200 Add: Alison's share in Holister's income for 2018 ($72700 x 40%) 29080 Less: Dividend received by Alison from Holister in 2018 ($19,000 x 40%) -7600 Less: Patent amortization for 2018 -1600 Balance in Investment in Holister account on December 31, 2018 113080

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