Question

2. On 1/1/2015, Choco paid $150,000 to acquire 40% of the voting common stock of Cookie. Following is the financial information about Cookie. Book value of assets $450,000 Book value of liabilities $125,000 Net income (2015) Net income (2016) $80,000 $100,000 Dividends (2015) Dividends (2016) $40,000 $45,000 Fair market value of investment 1/1/2015 Fair market value of investment 12/31/2016 $160,000 $180,000 Cookie has a patent with book value of $5,000 but actually $25,000 with 8 years remaining life.

Q1: What method should be used to record this investment?

Q2: Calculate goodwill (if any).

Q3: Calculate annual amortization of under/overvalued asset.

Q4: What is the balance of the investment account in Cookie at 12/31/2016?

Answer 1

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Question 1:
Equity Method should be used.
The equity method is the standard technique used when one company has a significant investment in another.
When a company holds approximately 20% or more of another company's stock, it is considered to have significant control, which signifies the power one company can exert over another.
Question 2:
Consideration for 40%		$150,000
Non Controlling Interest	150000/40*60	$225,000
Total Fair value		$375,000
Less:
Book Value of Assets	$         450,000
Book Value of Liabilities	$        -125,000	$325,000
Excess of Fair value		$ 50,000
Allocated:
Patent	25000-5000	$ 20,000
Goodwill	50000-20000	$ 30,000
Question 3:
Annual Amortization	20000/8 years	$    2,500
Question 4:
Investment value at 1/1/2015		$150,000
Add: Net Income for 2015	80000*40%	$ 32,000
Less: Annual Amortization for 2015	2500*40%	$   -1,000
Less: Dividend for 2015	40000*40%	$ -16,000
Add: Net Income for 2016	100000*40%	$ 40,000
Less: Annual Amortization for 2016	2500*40%	$   -1,000
Less: Dividend for 2016	45000*40%	$ -18,000
Investment Value at 31/12/2016		$186,000