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 amount that XYZ Corp will recognize or it's 2015 income statement, assuming it accounts for its investment in ABC Corp under the Equity Method?

Explanation / Answer

Under Equity Method XYZ corporation has to recognise the share in net income of ABC as Income of the comapny

Therefore, ABC Net Income = $ 800,000

Share of XYZ = $ 800,000*40% = $320,000

Rs. $ 320,000 XYZ will recognize on its 2015 Incoem statement.

Dividend received by XYZ from ABC has to be deducted from Investment account.

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