Question

E4.2 Help

Equity Method Accounting, Subsequent Years PL Communications acquired all of the stock of SJ Telecom on January 1,2019. It is now December 31, 2021, three years later. PL Communications uses the complete equity method to report its investment in SJ Telecom on its own books. Both companies have December 31 year-ends. The following information is available e PL Communications paid $400 million to acquire SJ Telecom. e At the date of acquisition, the book values of all of SJ Telecom's reported assets and liabilities ap- proximated fair value. Previously unreported limited-lived identifiable intangibles with a fair value of $20 million were recognized. These intangibles had an estimated life of 5 years, straight-line. There have been no impairment losses. . Total goodwill impairment losses for 2019 and 2020 were $1 million. There is no goodwill impair- ment for 2021 . The change in SJ Telecom's retained earnings from January 1,2019, to December 31,2020, was $12 million In 2021, SJ Telecom reported net income of $6,500,000 and declared and paid dividends of $1,500,000. SJ Telecom does not report any other comprehensive income Required a. Calculate equity in net income for 2021, reported on the books of PL Communications. b. Calculate the December 31, 2021 balance in Investment in SJ Telecom, reported on the books of PL Communications

Can someone please explain the calculations for this? Please show work.

Answer 1

a. Computation of net income for 2021 in the books of PL communications

Reported income of SJ Telecom	6,500,000
Less: Write off of identifiable intangibles (20mn/5) for 2021	4,000,000
Equity in net income	2,500,000

Note; Dividend paid will impact retained earnings. Hence, it has not been deducted from reported income.

b. Computation of balance in investment in SJ Telecom on the books of PL communications.

Investment to acquire SJ Telecom	400
Add: 100 % of retained earnings from 1.1.19 to 31.12.2020	12
Add: 100 % of reported income for 2021	6.5
Less: write offs for identifiable intangibles for 3 years (20/5)*3	12
Less: Goodwill impairment losses for 2019 and 2020	1
Less: Dividends declared and paid	1.5
Investment in SJ Telecom	404