Martinez Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski

Question

Martinez Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2017. The purchase price was $1,205,000 for 48,200 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2018. Kulikowski reported net income of $692,000 for 2018. The fair value of Kulikowski’s stock was $28 per share at December 31, 2018. Assume that the security is a trading security.

At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2018? What is the total net income reported in 2018 under each of these methods? Using fair value and equity method; find answers to investment amount (balance sheet), dividend revenue (income statement), unrealized holding gain (income statement), and investment income (income statement).

Explanation / Answer

Fair Value Method Equity Method Investment amount (balance sheet) No of shares * market price 48,200 * $28 = $ 1,349,600 Purchase consideration + Investment income - dividend received 1,205,000+ 20%*(692,000) - 81,940 = $ 1,261,460 Dividend revenue (income statement) No of shares * dividend/share * 2 (declared 2 times in last year) 48,200 * 0.85 * 2 = $ 81,940 NA Unrealized holding gain (income statement) (Market price - Purchase price) * no of shares (28-25)*48,200 = $ 146,000 NA Investment income (income statement) NA % of holding * current year income 20% * (692,000) = $ 138,400 Purchase price = 1,205,000/48,200 = $ 25

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