On January 3, 2015, Matteson Corporation acquired 40 percent of the outstanding

Question

On January 3, 2015, Matteson Corporation acquired 40 percent of the outstanding common stock of O’Toole Company for $1,370,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $866,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2015, O’Toole reported net income of $278,000 and declared cash dividends of $30,000. At December 31, 2015, what should Matteson report as its investment in O’Toole under the equity method?

Explanation / Answer

Net Income (278000*40%) 111200 Cash Dividend (30000*40%) 12000 Acquisition Price 1370000 Less: Book Value -866000 Copyright 504000 Less: Remaining useful life of copyright (years) 10 Yearly amortization (504000/10) 50400 Equity Income 111200 Less: yearly amortization -50400 Net Equity Income 60800 Opening Investment 1370000 Add Equity Income 60800 Less: Dividend -12000 Investment Closing 1418800

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