On January 1, 2014, Alison, Inc., paid $83,600 for a 40 percent interest in Hollister Corporation's common stock. This investee had assets with a book value of $279,500 and liabilities of $118,500. A patent held by Hollister having a $6,800 book value was actually worth $42,800. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2014, Hollister earned an income of $33,500 and declared and paid dividends of $11,000. In 2015, it had an income of $68,000 and dividends of $16,000. During 2015, the fair value of Allison's investment in Hollister had risen from $92,900 to $103,200.
A. Assuming Alison uses the equity method, what balance should appear in the Investment in Hollister account as of December 31, 2015?
B. Assuming Alison uses fair-value accounting, what income from the investment in Hollister should be reported for 2015?
When an entity acquires ownership interest from another entity, it can use fair value method, cost method, equity method, and etc, depending on the perspective of the company.
Answer and Explanation:
1. The balance of the Investment account using equity method is $91,920.
|Net Income 2014, adjusted||11,000|
|Net Income 2015, adjusted||24,320|
2, The income from investment is 16,000
Only dividends are considered income when using fair value method.
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from CFP Certification Exam Study Guide - Certified Financial PlannerChapter 8 / Lesson 1