Correction of Error
Hill Company paid $164,000 to acquire 40 percent ownership of Dale Company on January 1, 20X2. Net book value of Dale’s assets on that date was $300,000. Book values and fair values of net assets held by Dale were the same except for equipment and patents. Equipment held by Dale had a book value of $70,000 and fair value of $120,000. All of the remaining purchase price was attributable to the increased value of patents with a remaining useful life of eight years. The remaining economic life of all depreciable assets held by Dale was five years.
Dale Company’s net income and dividends for the three years immediately following the purchase of shares were
Year | Net Income | Dividends |
20×2 | $40,000 | $15,000 |
20×3 | 60,000 | 20,000 |
20×4 | 70,000 | 25,000 |
The computation of Hill’s investment income for 20X4 and entries in its investment account since the date of purchase were as follows:
| 20X4 Investment Income | |
Pro rata income accrual ($70,000 × 0.40) |
| $28,000 |
Amortize patents ($44,000 - 8 years) | $5,500 |
|
Dividends received ($25,000 × 0.40) |
| 10,000 |
20×4 investment income |
| $32,500 |
| Investment in Dale Company | |
1/1/×2 purchase price | $164,000 |
|
20×2 income accrual | 16,000 |
|
Amortize patents |
| $5,500 |
20×3 income accrual | 24,000 |
|
Amortize patents |
| 5,500 |
20×4 income accrual | 28,000 |
|
Amortize patents |
| 5,500 |
12/31/×4 balance | $215,500 |
|
Before making closing entries at the end of 20X4, Hill’s new controller reviewed the reports and was convinced that both the balance in the investment account and the investment income that Hill reported for 20X4 were in error.
Required
Prepare a correcting entry, along with supporting computations, to properly state the balance in the investment account and all related account balances at the end of 20X4.
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