On January 1, 2014, Alison, Inc., paid $72,000 for a 40 percent interest in Holi

Question

On January 1, 2014, Alison, Inc., paid $72,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $260,500 and liabilities of $115,500. A patent held by Holister having a $10,200 book value was actually worth $23,100. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2014, Holister earned income of $38,000 and declared and paid dividends of $12,000. In 2015, it had income of $61,500 and dividends of $18,000. During 2015, the fair value of Allison’s investment in Holister had risen from $84,500 to $92,700.

Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2015?

Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2015?

Explanation / Answer

Value of investment under Equity method

Note : Goodwill written off is assumed to be adjusted in the income of the year.

Income from Investment under Fair Value method

Income for 2015 = Change in fair value investment = 92,700 - 84,500 = $ 8,200

Particulars Amount Investment amount $ 72,000 Income 2014 ( 38,000 X 40%) $ 15,200 Dividends - $ 12,000 Income 2015 (61,500 X 40%) $ 24,600 Dividends - $ 18,000 Investment in Balance sheet dec 31, 2015 $ 81,800

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