ExpertHard1 markMultiple Choice
CPA · Question 22 · Area 2: Select Accounts
Investor Inc. purchased 30% of Investee Co. for $600,000 on Jan 1. The book value of Investee's net assets was $1,500,000. The difference was attributed to equipment with a 5-year remaining life. Investee reported Net Income of $200,000 and paid dividends of $50,000. What is the carrying value of the investment at Dec 31?
Investor Inc. purchased 30% of Investee Co. for $600,000 on Jan 1. The book value of Investee's net assets was $1,500,000. The difference was attributed to equipment with a 5-year remaining life. Investee reported Net Income of $200,000 and paid dividends of $50,000. What is the carrying value of the investment at Dec 31?
Answer options:
A.
$645,000
B.
$660,000
C.
$615,000
D.
$630,000
How to approach this question
Equity Method Formula: Beginning Balance + % Net Income - % Dividends - Amortization of Excess Purchase Price = Ending Balance.
Full Answer
C.$615,000✓ Correct
Purchase Price ($600k) - Share of BV ($1.5M * 30% = $450k) = $150k Excess. Attributed to Equipment (5 yrs) -> $30k/year amortization. Investment = $600k + $60k (Income) - $15k (Divs) - $30k (Amort) = $615,000.
Common mistakes
Forgetting to deduct dividends; forgetting to calculate and deduct amortization of the differential.
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