Question

On 1/1/19, Athlon Company acquired 75% of Opteron Corporation's common stock for $150,000. At the date of acquisition, Operon's common stock was $50,000 and the retained earnings were $60,000. The difference between Opteron's book value and fair value at the date of acquisition was attributable to depreciable fixed assets that had a continuing life of another 10 years. For 2009, Opteron reported net income of $50,000 and dividends of $45,000. In 2010, net income of $25,000 and dividends of $30,000 were reported. In 2011, net income of $10,000 and dividends of $15,000 were reported.

A) How much investment income would Athlon Company report in 2010 under the equity method?

B) What is the investment account balance on Athlon Company's books for its investment in Opteron corporation as of 12/31/11 under the equity method

C) How much investment income would Athlon Company Report in 2011 from its investment in Opteron under the Cost Method?

Answer 1

Part A

Common Stock			$          50,000
Retained earnings			$          60,000
Total Book value of Opteron Corporation			$        110,000
Investment in Opteron Corporation			$        150,000
Less: Book value of Opteron Corporation			$        110,000
Excess fair value over book value			$          40,000
Year	2009	2010	2011
Net income reported by Opteron	$          50,000	$         25,000	$          10,000
Less: Depreciation (40000/10)	$            4,000	$           4,000	$            4,000
Adjusted Net income of Opteron	$          46,000	$         21,000	$            6,000
Multiply: % of ownership acquired	75%	75%	75%
Income from Opteron Corporation under equity method	$          34,500	$         15,750	$            4,500
Investment income would Athlon Company report in 2010 under the equity method			$          15,750

Part B

Dividend declared	$             45,000	$             30,000	$             15,000
Multiply: % of ownership acquired	75%	75%	75%
Dividend received	33750	22500	11250
Year	2009	2010	2011
Beginning Balance	$          150,000	$          150,750	$          144,000
Add: Income from Opteron Corporation	$             34,500	$             15,750	$               4,500
Less: Dividend received	$             33,750	$             22,500	$             11,250
Ending Balance	$          150,750	$          144,000	$          137,250
Investment account balance on Athlon Company's books for its investment in Opteron corporation as of 12/31/11 under the equity method			$          137,250

Part C

Dividend received from a subsidiary company should be considered as revenue under the cost method. But here the question is about to liquidate dividend.
Liquidated dividend is not paid out of profit of corporation.
Retained earnings Balance as on 01/01/2011 (Total of net income - Total dividend paid) ((50000+25000)*75%)-(33750+22500))			$                       0
Net income of 2011			$             10,000
Retained earnings Balance available for distribute dividend for 2011 (0+10000)			$             10,000
Investment income would Athlon Company Report in 2011 from its investment in Opteron under the Cost Method (Amount restricted to 10000, if dividend paid more than 10000 than considered liquidated dividend.) (10000*75%)			$               7,500