USA: +1 725-224-8795 
Sign in
Can you further explain Ch 1 Problem 32P step 12 Advanced Accounting 12th Edition, Hoyle. I dont understand where the 75% comes from. Thank you.
Question regarding Plano’s investment in Sumter step 12: record amortization of patent expense for 6 mo on Jul 1.
Solution: expense for 6 mos = 3370 x 75% = 2527.25 / 2 = 1263.75. 1263.75 is the answer.
I dont know why I am taking 75% (9 out of 12 mos) of one year’s amortization expense to come up with the answer. Question is below:
On Jan 1 2013 Plano acquired 8% (16,000 shares) of o/s voting shares of Sumter for $192,000, an amount equal to Sumter’s underlying book and fair value. Sumter declares and pays a cash dividend to its stockholders each year of $100,000 on Sept 15. Sumter reported net income of $300,000 in 2013, $360,000 in 2014, $400,000 in 2015, and $380,000 in 2016. Each income figure and be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 16,000 shares wan indeterminate, and therefore the investment account remained at cost.
On Jan 1 2015 Plano purchased an additional 32% (64,000 shares) of Sumterfor $965,750 in cash and began to use the equity method.This price represented a $50,550 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make the this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.
On Jul 1 2016 Plano sold 10 percent (20,000 shares of Sumter’s outstanding shares for $425,000 in cash. Although it sold this interest, Plano maintained the ability to significantly Sumter’s decision making process. Assume that Pllano uses a weighted average costing system. Prepare the journal entries for Plano for the years of 2013 through 2016.
Expert Answer
we can discuss the step clearly. By understanding above factsb the entry is as follows
Equity in Investee Income……………………..1,264 (rounded)
Investment in Sumter……………………….1,264
(To record ½ year of patent amortization)
Working presented below-
Annual patent amortization—original computation…………………$3,370
Percentage of shares retained (60,000 ÷ 80,000)……………………..× 75%
Annual patent amortization—current …………………………………….$2,527.50 (3,370 * 75%)
Patent amortization for half year…………………………………………….$1,263.75. (2,527.50 / 2 )
Here yours doubt is why we have to use 75%. it’s not about 9 out of 12 months. it is about percentage of shares retained. In the problem it was given that on july 1, 20,000 shares are sold by plano. so that we need to claculate amortization on prorata basis which is 75% (60,000 / 80,000 *100 ).
