Question

Assume an investee has the following financial statement information for the three years ending December 31, 2013: (At December 31) 2011 2012 2013 Current assets $ 103,500 $138,850 $142,735 Tangible fixed assets 281,500 287,150 330,865 Intangible assets 25,000 22,500 20,000 Total assets $410,000 $448,500 $493,500 Current liabilities $50,000 $55,000 $60,500 Noncurrent liabilities 110,000 121,000 133,100 Common stock 50,000 50,000 50,000 Additional paid-in capital 50.000 50.000 50,000 Retained earnings 150,000 172,500 200,000 Total liabilities and equity $410,000 $448,500 $493,500 (At December 31) Revenues Expenses 2011 2012 2013 $425,000 $460,000 $485,000 387,500 420,000 438,000 $37,500 $40,000 $47,000 $12,500 $17,500 $19,500 Net income Dividends Review of pre-consolidation equity method (controlling investment in affiliate, fair value differs from book value) Assume that on January 1, 2011, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee's identifiable net assets had fair values that approximated their historical book values, except for tangible fixed assets, which had fair value that was $50,000 higher than the investee's recorded book value. The tangible fixed assets had a remaining useful life of 10 years. In addition, the acquisition resulted in goodwill in the amount of $100,000 recognized in the consolidated financial statements of the investor company. Assuming that the investor company uses the equity method to account for its investment in the investee, what is the balance in the "income from investee" account in the investor company's pre-consolidation income statement for the year ended December 31, 2013? $22,500 $27,500 $47,000 $42,000

Answer 1

Under the Equity Method, Investor company records the Income from Investee and Debit its Investment in Investee A/c. In the given case, as the Investor company holds 100% common stock in investee, the entire Net income of $47,000 pertaining to year ended December 31, 2013 will be recognized by the Investor Company. Hence, correct answer is C $47,000.