On January 2, 2006, Pagan Corporation acquired 40% of the outstanding common sto
ID: 2385548 • Letter: O
Question
On January 2, 2006, Pagan Corporation acquired 40% of the outstanding common stock of Sancto Company for $1,000,000. On that date, the current fair value of Sancto's identifiable net assets was $2,000,000, and Pagan did not attribute the excess of the cost of its investment in Sancto over its equity in Sancto's identifiable net assets to any one factor. Sancto's 2006 net income was $250,000. Pagan planned to increase its investment in Sancto to a controlling interest, and Pagan accounted for its investment in Sancto under the equity method of accounting. The maximum amount that may be included in Pagan's 2006 income before income taxes to reflect investment income from Sancto is:$95,000
$100,000
$200,000
$245,000
Explanation / Answer
On January 2, 2006, Pagan Corporation acquired 40% of the outstanding common stock of Sancto Company for $1,000,000. On that date, the current fair value of Sancto's identifiable net assets was $2,000,000, and Pagan did not attribute the excess of the cost of its investment in Sancto over its equity in Sancto's identifiable net assets to any one factor. Sancto's 2006 net income was $250,000. Pagan planned to increase its investment in Sancto to a controlling interest, and Pagan accounted for its investment in Sancto under the equity method of accounting. The maximum amount that may be included in Pagan's 2006 income before income taxes to reflect investment income from Sancto is:
$95,000
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