During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2012, Wilton recorded net income of $600,000. For 2013, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years.
What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2013?
Investment using equity method:
The equity method is used in accounting for investment when an investor acquires 20% -50% interest over the acquired company and resulted in significant influence.
Answer and Explanation:
|Share in net Income in 2012, adjusted||142,000|
|Investment balance, end of 2012||1,342,000|
|Share in net Income in 2013, adjusted||187,000|
|Investment balance, end of 2013||1,329,000|
Share in net income unadjusted: 750,000 * 30% = 225,000
Amortization expense: 380,000 / 10 = 38,000
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from CFP Certification Exam Study Guide - Certified Financial PlannerChapter 8 / Lesson 1