In January 2008 ABC Corp acquired 20% of the outstanding voting common stock of
ID: 2378627 • Letter: I
Question
In January 2008 ABC Corp acquired 20% of the outstanding voting common stock of BNY Co. for $280,000. This investment enabled ABC to exercise significant influence over BNY. The book value of the acquired shares was $210,000. The excess of cost over book value was attributed to an indentifiable intangible asset that was undervalued on BNY balance sheet, and that had a remaining useful life of 10 years.For the year ended December 2008, BNY reported income of $63,000 and paid cash dividends of $14,000 on its common stock. What is the proper carrying value of ABC's investment in BNY at December 31, 2008?
A) $270,000
B) $273,000
C) $280,000
D) $282,800
Explanation / Answer
We are given two clues on what type of method we should use to consolidate this investment in BNY. We are given that ABC owns 20% and has significant influence (not complete control) over BNY. This means we must use the "equity" method to consolidate this investment. To do this, we must take the value of the investment in BNY at cost and add the fractional income BNY earned, subtract the dividends BNY paid, and subtract and amortization of assets ABC acquired in buying the BNY stake. The equation: Ending BS account for BNY = Beg BS account for BNY + (% owned x Income of BNY) - (% owned x dividends paid by BNY) - (amortization of intangible assets of BNY) Beg BS account for BNY = for equity method its the cost of the transaction or $280,000 We know BNY made $63,000 in income and ABC owns 20% so that's 12,600 We also know BNY paid $14,000 in dividends and ABC loses 20% of that so $2,800 We are told that the purchase price is $280,000, the book value is $210,000, with the difference attributed towards intangible assets that must be amortized over 10 years. This means that each year, a ($280,000-210,000)/10 = $7,000 cost must be amortized each year for the next ten years. So that number is $7,000. You do NOT need to multiple this by the fractional amount of ownership. So our ending value is $280,000 + $12,600 - $2,800 - $7,000 = $282,500 or D) Hope this helps!
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