On January 1, 2017, Alison, Inc., paid $83,800 for a 40 percent interest in Holister Corporation’s...
On January 1, 2017, Alison, Inc., paid $83,800 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $290,500 and liabilities of $117,000. A patent held by Holister having a $13,600 book value was actually worth $31,600. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2017, Holister earned income of $40,700 and declared and paid dividends of $14,000. In 2018, it had income of $70,000 and dividends of $19,000. During 2018, the fair value of Allison’s investment in Holister had risen from $95,380 to $106,180.
a. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2018?
b. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2018?
Homework Answers
a. Equity Method
| Particulars | 2017 | 2018 |
| Income | $40700 | $70000 |
| Less : Dividend | $14000 | $19000 |
| Less : Additional amortisation of Patent ($31600 - $13600)/6 years | $3000 | $3000 |
| Net Income from Holister Inc | $23700 | $48000 |
| Holding percentage value (40%) | $9480 | $19200 |
| Value of investment in Holister ($106180 + $9480 + $19200) = $134860 | ||
b. Fair Value Accounting
| Particulars | Amount |
| Income 2017 | $40700 |
| Add : Income 2018 | $70000 |
| Add : Increase in value of Investments ($106180 - $95380) | $10800 |
| Less : Liabilities | $117000 |
| Net Value | $4500 |
| % Holding 40% ($4500*40%) | $1800 |
| Hence Investment value using fair value accounting is $1800 for year ended 2018. |
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