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On january 1, 2017, alison inc paid $81200 for a 40% interest in Holister Corporation’s common stock. This investee had assets with a book value of $219,000 and liabilities of $80,500. A patent held by Holister having a $7,400 book value was actually work 55,400. This patent had a six-year remaining life. any further excess cost associated with this acquisition was attributed to goodwill. During 2017, Holister earned income of $54,200 and declared and paid dividends of $18,000. In 2018, It had income of $66,700 and dividends of $23,000. During 2018 the fair value of Allison’s investment in Holister had risen from $95,480 to $98,960.
1. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 21018
2. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2018.
Expert Answer
1.
Acquisition price $ 81,200
Book value (Assets – Liabilities) $ 55,400
($ 138,500 x 40%)
Excess payment $ 25,800
Value of Patent in excess of
book value ($ 48,000 x 40%) $ 19,200
Goodwill $ 6,600
Patent ( $19,200 / 6) $ 3,200
Goodwill 0
Annual Amorization $ 3,200
Acquisition Price $ 81,200
Basic Equity Accrual 2017
($ 54,200 x 40%) $ 21,680
Dividends – 2017
($ 18,000 x 40%) ($ 7,200)
Amortization – 2017 (above) ($ 3,200)
Investment in Holister
12/31/17 $ 92,480
Basic Equity Accrual 2018
($ 66,700 x 40%) $ 26,680
Dividends 2018
($ 23,000 x 40%) ($ 9.200)
Amortization – 2018 ($ 3,200)
Investment in Holister
12/31/18 $ 106,760
2.
Dividend Income
($ 23,000 x 40%) $ 9,200
Increase in Fair Value
($ 98,960 – $ 95,480) $ 3,480
Investment income under
fair-value accounting-2018 $ 12,680
