On January 1, 2015, XYZ Corp purchases 40% of ABC Corp for $2,000,000 in cash. I

Question

On January 1, 2015, XYZ Corp purchases 40% of ABC Corp for $2,000,000 in cash. In addition, you have the following information: ABC Corp's assets were all recorded at fair value except inventory (which had a book value of $500,000 and a fair value of $600,000) and machinery (which had a book value of $1,000,000 and a fair value of $1,200,000) - The machinery had a remaining life of 5 years and no residual value. All inventory was sold by the end of 2015 During 2015 ABC Corp earned net income of $800,000 and paid a dividend of $400,000. What is the value of the investment in ABC Corp on XYZ Corp's 12/31/15 Balance Sheet, assuming it accounts for its investment in ABC Corp under the Equity Method?

Explanation / Answer

Cost of Investment = $ 2000000

+ Adjustment of Income earned $ 800000 x 40% = $320000

- Adjustment of Dividend $ 400000 x 40% =$160000

= Value of Investment = $2160000

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