On January 1, 2014, ABC, Inc., paid $70,500 for a 40 percent interest in Charlot
ID: 2491309 • Letter: O
Question
On January 1, 2014, ABC, Inc., paid $70,500 for a 40 percent interest in Charlotte Corporation’s common stock. This investee had assets with a book value of $224,500 and liabilities of $96,500. A patent held by Charlotte having a $13,300 book value was actually worth $41,800. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2014, Charlotte earned income of $51,500 and declared and paid dividends of $17,000. In 2015, it had income of $70,500 and dividends of $22,000. During 2015, the fair value of ABC’s investment in Charlotte had risen from $85,700 to $93,300.
a.Calculate the annual amortization. (Show your calculation)
b.Assuming ABC uses the equity method, what balance should appear in the Investment in Charlotte account as of December 31, 2015? (Show your works)
c.Assuming ABC uses fair-value accounting, what income from the investment in Charlotte should be reported for 2015? (Assume that the unrealized gains or losses are reported in the income statement)
Explanation / Answer
Solution:
a) Calculation of the annual amortization:
Amortization:
b) Assuming ABC uses the equity method, what balance should appear in the Investment in Charlotte account as of December 31, 2015?
Hence, the investment in Charlotte Corporation at December 31, 2015 = 99,900
c) Assuming ABC uses fair-value accounting, what income from the investment in Charlotte should be reported for 2015?
Hence, the income from the investment in Charlotte should be reported for 2015 = 16,400
Acquisition price 70,500 Book value - assets minus liabilities (224,500 - 96,500) * 40% 51,200 Excess payment 19,300 Less Value of patent in excess of book value (41,800 - 13,300) * 40% 11,400 Goodwill 7,900Related Questions
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