On January 1, 2017, Blue Co. purchased 27,000 shares (a 10%
interest) in Elton John Corp. for $1,500,000. At the time, the book
value and the fair value of John’s net assets were
$12,300,000.
On July 1, 2018, Blue paid $3,170,000 for 54,000 additional shares
of John common stock, which represented a 20% investment in John.
The fair value of John’s identifiable assets net of liabilities was
equal to their carrying amount of $13,700,000. As a result of this
transaction, Blue owns 30% of John and can exercise significant
influence over John’s operating and financial policies. (Any excess
fair value is attributed to goodwill.)
John reported the following net income and declared and paid the
following dividends.
|
Net Income |
Dividend per Share |
|||
| Year ended 12/31/17 | $640,000 | None | ||
| Six months ended 6/30/18 | 490,000 | None | ||
| Six months ended 12/31/18 | 881,000 | $1.40 |
Determine the ending balance that Blue Co. should report as its
investment in John Corp. at the end of 2018.
| Investment in Elton John Corp |
On Jan 1st 2017
Investment in J Corp. a/c……Dr 1,270,000
To Cash …….Cr 1,270,000
In year end 2017 no dividend paid and the net income is $640,000 and share of Blue Co. is 10% so the amount is $64,000
Total carrying amount of investment = $1,270,000 + $64,000
= $1,334,000
Before July 1st 2018 half year the net income is $490,000 and the share of Blue Co. is 10% so amount is 49,000.
Total carrying amount = $1,334,000 + $49,000 = $1,383,000
July 1st 2018
Investment in J Corp. a/c………Dr 3,170,000
To Cash a/c……………..Cr 3,170,000
As of now the total investment in = $1,383,000 + 3,170,000 = $4,553,000
The net income which received is 30% of 881,000 = 264,300
Dividend received is 1.40* 81,000 = $113,400
This has to be adjusted in the carrying amount = $4,553,000 + 264,300 - $113,400
= 4,703,900
Hence, investment in E J Corp. is 4,703,900.
On January 1, 2017, Blue Co. purchased 27,000 shares (a 10% interest) in Elton John Corp....