Question

9. Wilson Company acquired 10% of Rogers, Inc. on January 1, 2018 for $200,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2019 the fair value of Rogers stock was $3,000,000 in total. On January 1, 2019, Wilson also acquired an additional 30% of Rogers for $800,000 which resulted in significant influence over Rogers' operations. Roger's book value on January 1, 2019 was $2,000,000, although they owned a patent that was not recorded on their financial statements which had a fair value of $500,000. The remaining life of the patent was 5 years. Any remaining excess of the fair value of Rogers over its book value was attributable to Goodwill. During 2019, Rogers reported net income of $400,000 and paid a dividend of $200,000. Compute the balance in the investment account as of December 31, 2019, after considering Wilson's change to the equity method as of January 1, 2019.

Answer 1

Assumptions applied: Net Income of $400,000 is considered after payment of dividends.

Under Equity method Investments are recorded at cost and adjustments are made for changes in Share in the net assets of the associate entity.

Assets which are not recorded in the books of associate entity are also considered while calculating its net assets fair value.

Under step by step acquisition, the investments already held in the associate entity are brought to there fair value as on the date of acquisition of further investments.

Thus, the Balance in the Investment account as of December 31, 2019, is calculated as follows:

		Net assets as on 1/1/19	Changes during the year	Net assets as on 31/12/19
	Book Value	$                2,000,000.00	$                     400,000.00	$                     2,400,000.00
	Add:
	Fair value of the assets not recorded in books	$                   500,000.00		$                        500,000.00
	Dividend paid		$                     200,000.00	$                        200,000.00
		$                2,500,000.00	$                     600,000.00	$                     3,100,000.00
	Wilson share in profit (40%)		$                     240,000.00
	Value of Investments as on 31/12/19:
	Particulars		$
	Fair value of investments already held		$                  3,000,000.00
ADD:	Cost of investments purchased		$                     800,000.00
ADD:	Wilson share in profit (40%)		$                     240,000.00
Less:	Dividend received (40% of $200,000)		$                     (80,000.00)
	Balance of investments as on 31/12/19		$                 3,960,000.00