Question

Assume that, on January 1, 2021, Sosa Enterprises paid $2,060,000 for its investment in 30,000 shares of Orioles Co. Further, assume that Orioles has 100,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2021, the book value of Orioles' identifiable net assets was $7,080,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,700,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Orioles during 2021: Net Income Dividends declared and paid Market price of common stock on 12/31/2021 $500,000 $300,000 $ 80/share What amount would Sosa Enterprises report in its year-end 2021 balance sheet for its investment in Orioles Co.?

Answer 1

Solution:

Answer = $2,074,250

Percentage of holding held by Sosa enterprise in orioles.co. = 30,000 / 100,000 = 0.30 or 30%

The amount that would be reported by Sosa enterprise for the year ending 2021 balance sheet for its investment in Orioles.co. = Amount paid for investment + 30% of net income - 30% of dividends paid - 30% of additional depreciation.

= $2,060,000 + (30% $\times$ $500,000) - (30% $\times$ $300,000) - (30% $\times$ $152,500)

= $2,060,000 + $150,000 - $90,000 - $45,750

= $2,074,250.

Explanation:

Depreciation assets = Total fair value - identifiable assets - amount belongs to land

Depreciation assets = $10,000,000 - $7,080,000 - $1,700,000

Depreciation assets = $1,220,000

Depreciation amount = $1,220,000 / 8 years = $152,500

Answer 2

The answer is $2,074,250.