QI:Tom Company acquires 40% of the voting stock of Alex Corporation for S16,000,
ID: 2567303 • Letter: Q
Question
QI:Tom Company acquires 40% of the voting stock of Alex Corporation for S16,000,000 on January 1, 2015. At the time, the book value of Alex was S20,000,000. During 2016, Alex reported net income of S5,000,000 and paid dividends of S1,200,000. Both companies have December 31 year-ends, and there is no impairment of the investment. What is the investment balance on Tom's balance sheet on December 31, 2016? $16,000,000 B. $18,520,000 C. $18,000,000 D. $17,520,000 Q2:Now assume Alex's book value at the date of acquisition was $30,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of 10 years. Straight-line amortization is appropriate. What amount does Tom report as equity in net income of Alex for 2015? A. $1,600,000 B. $4,000,000 C. $1,112,000 D. $2,000,000 25% 25% 25% 25%Explanation / Answer
A)Using equity method of consolidation
Investment value 16000000
less Dividend Received (1200000*.40)=480000
Add share of profit (5000000*.40)=2000000
=17520000
B) Book Value 30,000,000
Investor share=30,000,000*.40=12,000,000 but the investor paid 16,000,000, excess paid=4,000,000 to be amortised over a period of 10 yeras =4,000,000/10=400,000
C) Investment value =16,000,000
less dividend paid =480,000
Add : Share of profit =2,000,000
less : amortised value =400,000
=17,120,000
D) Since the stock incluedes the profit so if we will remove the markup the closing stock will come down and the net income will also come down
cost of the stock should be =100/120*200,000=166,667
so the profit will go down by 13,333(200,000-166,667)
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