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Emily Corporation purchased all of Ace Company's common stock on January 1, 2020, for $1,000,000 cash....

Emily Corporation purchased all of Ace Company's common stock on January 1, 2020, for $1,000,000 cash. The investee's stockholders' equity amounted to $400,000. The excess of $600,000 was due to an unrecorded patent with a six-year life. In 2020, Ace reported net income of $250,000 and paid dividends of $25,000.

For 2020, what amount of Equity Income will Emily record?

  1. $150,000
  2. $125,000   
  3. $175,000   
  4. $825,000

  

  

  

Assume the facts in Question 27. What is the Equity Investment balance at December 31, 2020?

  1. $   825,000
  2. $1,100,000
  3. $1,125,000
  4. $1,175,000
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Answer #1

1. What amount of Equity Income will Emily record?

Answer: a.$150,000

Explanation:

Ace reported net income $250,000
Amortization expense ($100,000)
Emily's Equity Income $150,000

*Given that, the excess of $600,000 was due to an unrecorded patent with a six-year life.

So, $600,000 should be amortized over the 6 years.

Hence, Amortization Expense = $600,000/6 years = $100,000.

2. What is the Equity Investment balance at December 31, 2020?

Answer: c.$1,125,000

Explanation:

Equity Investment in Ace Company, Jan 1,2020 $1,000,000
Equity income (as calculated above) $150,000
Dividends received ($25,000)
Equity Investment in Ace Company, Dec 31,2020 $1,125,000
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