On January 1, 2017, Alison, Inc., paid $86,900 for a 40 percent interest in Holi
ID: 2605886 • Letter: O
Question
On January 1, 2017, Alison, Inc., paid $86,900 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $229,500 and liabilities of $79,500. A patent held by Holister having a $11,500 book value was actually worth $50,500. 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 $53,500 and declared and paid dividends of $18,000. In 2018, it had income of $51,000 and dividends of $23,000. During 2018, the fair value of Allison’s investment in Holister had risen from $99,600 to $102,400.
a. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2018? (Investment in holister?)
b. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2018?
(Investment income?)
Explanation / Answer
b.
For 2018 the income will be share of the dividends paid by Holister, i.e., 40% of $23,000 =$9,200.
The increase in the fair value of the investment will be acounted under unrealized Gain /loss on equity investment.
a. Balance in the Investment in Holister account as at Dec.31, 2018 105670 Equity method Date Details Amount Jan.1, 2017 Investment made for 40% stake 86900 Dec.31, 2017 Amortization of excess fair value * -3315 Dec.31,2017 Share of income (40% of 53,500) 21400 Dec.31, 2017 Share of dividend paid (40% of 18,000) -7200 Dec.31, 2017 Investment account balance 97785 Jan.1, 2018 Balance of investment account 97785 Dec.31, 2018 Amortization of excess fair value * -3315 Dec.31,2018 Share of income (40% of 51,000) 20400 Dec.31, 2018 Share of dividend paid (40% of 23,000) -9200 Dec.31, 2018 Investment account balance 105670 Working: Assets 229500 Liabilities 79500 150000 40% of this net assets 60000 Price paid 86900 Excess paid 26900 Fair value of patent 50500 Book value of patent 11500 Excess of faoir value for patent 39000 40% of this excess value 15600 Amount paid for goodwill(26,900 - 15,600) 14300 Patent to be amortized over 6 years Goodwill is to be amortized say, over 20 years. Annual amortization of patent (15,600/6) 2600 Annual amortization of goodwill (14,300/20) 715 Total amortization * 3315