Eton Corporation acquires 30% of the voting stock of Fairfield Company for $60,000,000 on January 1, 2019, and classifies the investment as an equity method investment. At the time, the book value of the company was $200,000,000. Eton determined that the book value of Fairfield’s plant assets (15 year life, straight-line) were overstated by $10,000,000 and Fairfield had unreported intangible assets (5 year life, straight-line) with a fair value of $8,000,000. During 2019 Fairfield reported net income of $2,400,000 and declared and paid dividends of $1,000,000. Both companies have December 31 year-ends.
At what amount will Eton report its investment in Fairfield on its December 31, 2019 balance sheet?
a. $60,000,000
b. $60,140,000
c. $60,540,000
d. $60,040,000
Investments in associate, under equity method, are reported at historical costs and adjusted for any changes in the carrying value on account of profits/losses in the subsequent years of acquisition and the reduction in the value if any dividend is paid by the associate.
Solution:
Computation of Correct Profits:
| Profits as reported | 2400000 | |
| Less: | Amortization of Patents | =8000000/5 |
| Add: | Write back of excess depreciation on Plant | =10000000/15 |
| =I13-I14+I15 | ||
| Company's Share | =I16*0.3 |
| Profits as reported | 2400000 | |
| Less: | Amortization of Patents | 1600000 |
| Add: | Write back of excess depreciation on Plant | 666666.7 |
| Corrected Profits | 1466667 | |
| Company's Share | 440,000 |
Computation of Investments as per Equity Method
:
Carrying Value of Investments = 60,000,000
(+) Profit Share = 440,000
(-) Dividend Share of Eton = 300,000
60,140,000
Therefore, the amount of investments to be reported in Eton Financials is $ 60,140,000.
Eton Corporation acquires 30% of the voting stock of Fairfield Company for $60,000,000 on January 1,...
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