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On January 1, 2009, Davis acquires 30% of the outstanding common stock of Erdman for $800,000. Davis has significant influence. At that date Erdman had assets with a book value of $5,000,000 and liabilities with a book value of $3,000,000. Any excess of the price paid by Davis over the book value of net assets acquired is attributable to a trademark, which has a remaining life of 5 years. In 2009 Erdman has net income of $200,000 and pays dividends of $80,000. In 2010, Erdman has net income of $150,000 and pays dividends of $60,000. What is the balance of Davis Investment in Erdman at December 31, 2010 ?
Expert Answer
| Value of Davis Investment in Erdman as on Jan.1,2009 = Net assets of Erdman as on Jan.1,2009 * 30% stake | ||||
| Value of Davis Investment in Erdman as on Jan.1,2009 = [$50,00,000 – $30,00,000] * 30% = $6,00,000 | ||||
| Share of Davis in Net income of Erdman for 2009 = $200000*30% = $60,000 | ||||
| Share of Davis in Net income of Erdman for 2010 = $150000*30% = $45,000 | ||||
| Calculation of the balance of David Investment in Erdman at December 31,2010 | ||||
| Value of Investment as on Jan.12009 | $600,000 | |||
| Add : Share in Net income of Erdman for 2009 | $60,000 | |||
| Add : Share in Net income of Erdman for 2010 | $45,000 | |||
| Less : Dividend received out of Net Income of 2009 [$60000*40%] | $24,000 | |||
| Less : Dividend received out of Net Income of 2010 [$45000*40%] | $18,000 | |||
| Balance of David Investment in Erdman at December 31,2010 | $663,000 | |||
