On January 1, 2017, Alison, In
On January 1, 2017, Alison, Inc., paid $85,700 for a 40 percentinterest in Holister Corporation’s common stock. This investee hadassets with a book value of $256,000 and liabilities of $83,500. Apatent held by Holister having a $9,800 book value was actuallyworth $20,300. This patent had a six-year remaining life. Anyfurther excess cost associated with this acquisition was attributedto goodwill. During 2017, Holister earned income of $48,000 anddeclared and paid dividends of $16,000. In 2018, it had income of$52,000 and dividends of $21,000. During 2018, the fair value ofAllison’s investment in Holister had risen from $99,100 to$105,100.
a. Assuming Alison uses the equity method, what balance shouldappear in the Investment in Holister account as of December 31,2018?
b. Assuming Alison uses fair-value accounting, what income fromthe investment in Holister should be reported for 2018?
Answer:
| a | Assumung Alison uses theequity method, balance that should appear in the | ||
| investment in Holister account as of December 31,2018 | |||
| Consideration paid for 40% share | $85,700 | ||
| Less: Book value of 40% net asset value($256000-$83500) | $69,000 | ||
| Excess of fair value over book value | $16,700 | ||
| Excess allocated to | |||
| Patent- 40% (20300-9800) | $4,200 | ||
| Goodwill | $12,500 | ||
| Investment in Holister account on Jan 1, 2017 | $85,700 | ||
| Add: Net income of Holister for 2017-40% | $19,200 | ||
| Less: Dividend received-40% | $6,400 | ||
| Less: Patent amortization | $700 | ||
| Investment in Holister account on Dec 31, 2017 | $97,800 | ||
| Add: Net income of Holister for 2018-40% | $20,800 | ||
| Less: Dividend received-40% | $8,400 | ||
| Less: Patent amortization | $700 | ||
| Investment in Holister account on Dec 31, 2018 | $109,500 | ||
| b | Assuming Alison uses fair value accounting, Incomefrom the investment in Holister | ||
| that should be reported for 2018 | |||
| Dividend paid by Holister | $21,000 | ||
| 40% share of Alison | $8,400 | ||
| Changes in Fair value (105100-99100) | $6,000 | ||
| Income from Investment in Holister | $14,400 | ||
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