Investments Puppy Company has significant influence over its investee, Orion Com

Question

Investments

Puppy Company has significant influence over its investee, Orion Company.   Orion’s owners’ equity has fair market value of $400,000 on January 1, Year 1.  Puppy owns 40% of Orion.  Puppy had paid $200,000 for this 40% interest on January 1, Year 1.  Orion’s income for Year 1 was $50,000 and Orion paid $1,000 cash dividends to its owners at the end of Year 1.  There was one depreciable asset owned by Orion with a fair market value in excess of its book value on the date the investment in Orion was acquired by Puppy.  The dollar amount of this excess was $60,000.   This asset had a 7-year remaining useful life on the date of Puppy’s investment in Orion.

Required: Determine the proper balance in Puppy’s Investment account for Orion on January 1, Year 2, based on the information given here.

$__________

Required: Determine the amount by which Puppy’s Year 1 income increased as a direct result of having made this investment in Orion on January 1, Year 1.

$__________

Required:  Determine how much Goodwill is implicit in the investment’s purchase price on January 1, Year 1.

$__________

Explanation / Answer

Puppy Company Details Amt $ Orion's Equity Value Jan 1, Year 1            400,000 Puppy Co's 40% share            160,000 Additional Fair value of Asset              60,000 40% Share of Puppy Co              24,000 Total Value of Puppy Co's 4% share            184,000 Amount Paid for Orion's 40% share            200,000 Goodwill implicit in purchase              16,000 Life of asset with excess fair value in years                         7 Yearly depreciation in fair value in Puppy Co'S Book                 3,429 Puppy Co's Invetsment in Orion Jan 1 Year2 Details Amt $ Acquisition value Jan 1. year 1            200,000 Add Equity share 40% of Orion's Year 1 profit              20,000 Less: Excess Fair value deprecition              (3,429) Less : Dividend Paid(40% share of total dividend)                  (400) 1 Net Investment Value Jan 1. Year 2. $        216,171 2 Increase in Income In investment Year1 Equity share 40% of Orion's Year 1 profit              20,000 Less: Excess Fair value deprecition              (3,429) Net Income as a direct result of investment $          16,571 in Year 1   3 Goodwill implicit in purchase of invetsment on Jan 1 Year 1 $    16,000.00

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