At the start of the year, Ace Accountants, Inc purchased 30% of Bean Counters In

Question

At the start of the year, Ace Accountants, Inc purchased 30% of Bean Counters Inc (BCI) for $45 million. At the time of the purchase, the book value of BCI's net assets was $75 million. The fair market value of BCI's assets was $15 million in excess of their book value. For the year, BCI reported net income of $75million and paid $15 million in dividends. The remaining life of BCI's depreciable assets is 10 years The entire difference between book value and fair value of Bean's assets is due to depreciable assets.

Explanation / Answer

Solutions:

As per IAS 28, Investments in Associates are valued using equity method. In equity method, investment is recorded at cost and is subsequently adjusted with the profit & loss and income received from the associate.

In the given case, the same shall be calculated as follows:

Cost paid to BCI                                      -   $45 million

Add: Profit = ($75-$15)milion * 30%       -   $ 18 million

Add: Dividend received $15 million*30% -   $ 4.5 million

Value of Investment                                -   $ 67.5 million

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