Question

Equity Method Investment Several Years after Acquisition

On January 2, 2011, Best Beverages acquired 27 percent of the stock of Better Bottlers for $18 million in cash. Best Beverages accounts for its investment using the equity method. At the time of acquisition, Better Bottlers' balance sheet was as follows (in millions):

Better Bottlers Balance Sheet, January 2, 2011
(in millions)
Assets
Current assets	$12
Property and equipment, net	249
Patents and trademarks	90
Total assets	351
Liabilities and equity
Current liabilities	25.2
Long-term debt	310.8
Total liabilities	336
Capital stock	7.2
Retained earnings	7.8
Total equity	15
Total liabilities and equity	$351

At the date of acquisition, valuation of Better Bottlers' assets and liabilities revealed that its reported patents and trademarks (12-year life) had a fair value of $96 million and it had unrecognized brand names (18-year life) worth $5.4 million.

Several years later, Better Bottlers' December 31, 2014 retained earnings balance is $15 million. For 2014, it reported net income of $1.5 million and paid $390,000 in dividends.

For all answers below, enter the complete figures using all zeros. For example, $1 million should be entered as 1,000,000.

(b) Calculate the Investment in Better Bottlers balance, reported on Best Beverages' December 31, 2014 balance sheet.

Answer 1

Calculation of 2011 equity in net income Better Bottler's net income ($ 1,500,000 @27%) 405000 (135000) Less: Amortization of patents and trademarks [96-90-1000000 @27% Revaluation 12 Less: Amortization of brand names (54,00,000 /18 @27%) (81000) Equity in net income of Better bottles 189000 Journal Entries Investment in better bottles 189000 Equity in net income of better bottles 189000 Cash ($390,000@27%) 105300 investment in better bottles 105300

Calculation of investment balance Investment balance Jan 2, 2011 18000000 Add: Reported income less dividends (15,000,000 equity - 7800,000 retained earnings) @27% 1944000 4 Years revaluation write off 135000*4 (Calculated Above) (540000) 81000*4 (Calculated Above) (324000) Investment balance Dec 31, 2014 19080000