On January 1, 2014, Alison, Inc., paid $72,000 for a 40 percent interest in Holi

Question

On January 1, 2014, Alison, Inc., paid $72,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $260,500 and liabilities of $115,500. A patent held by Holister having a $10,200 book value was actually worth $23,700. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2014, Holister earned income of $39,000 and declared and paid dividends of $13,000. In 2015, it had income of $61,500 and dividends of $18,000. During 2015, the fair value of Allison’s investment in Holister had risen from $84,500 to $92,700.

Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2015?

Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2015?

Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2015?

Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2015?

Explanation / Answer

Alison Inc Purchase Price calculation Details Amt $ Purchase price paid                   72,000 Holister assets book value                 260,500 Add Fair value increase of patent                   13,500 Less Liabilities book value                 115,500 Net assets of Holister                 158,500 40% share of net assets                   63,400 Good will                      8,600 Patnet remaining life                              6 years Yearly fair value amortization patent                      2,250 Patent FV amortization share of Alison                         900 per year Investment Balance Year 2014   Amt $ Investment Balance                   72,000 Add : Equity Income from Holister @40% of 39000                   15,600 Less FV Amortization                       (900) Less : Dividend Received @40% of 13000                   (5,200) Invetsmnet Balance                     81,500 Year 2015 Investment Balance                   81,500 Add : Equity Income from Holister @40% of 61500                   24,600 Less FV Amortization                       (900) Less : Dividend Received @40% of 18000                   (7,200) Invetsmnet Balance                     98,000 So as per Equity invetment method , the   balance of investment on Dec 31,2015   would be $ 98,000 If Fair value accounting is done , then   Income in 2015 would be ; 1. 40% share of dividend Income                      7,200 2. Fair value increase as Unrealised Gain                        8,200 Total Income                     15,400

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