On January 3, 2016, Austin Corp. purchased 25% of the voting common stock of Gai

Question

On January 3, 2016, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of this investment, Gainsville's stockholder's equity was $8,000,000.
Austin gathered the following information about Gainsville's assets and liabilities:

Equipment (5 year life) had a book value of $1,200,000 and a fair value of 2,000,000

For all other assets and liabilities, book value and fair value were equal. During 2016, Gainsville had a net loss of $3,000,000 and paid dividends of $1,600,000.

(a)What amount should Austin report as Investment income for 2016?
(b) what is the balance investment account on December 31, 2016.? Please show work.

Explanation / Answer

Price paid for 25%            2,500,000 Fair value of equity          10,000,000 (2500000/25%) Less: Book value of equity            8,000,000 Excess of fair value over book value            2,000,000 Allocated to equipment                800,000 (2000000-1200000) Balance allocated to goodwill            1,200,000 Equipment life is 5 yrs: excess amortization 800000 ÷ 5                160,000 (a) What amount should Austin report as Investment income for 2016? Net loss          (3,000,000) Less: excess amortization              (160,000) Total loss          (3,160,000) Austin share at 25% x 25%              (790,000) Ans part a (b) Investment balance beginning $        2,500,000 Add: investment income from (a)              (790,000) Less: dividend share at 25%              (400,000) (1600000 x 25%) Investment balance ending DEC 31, 2016 $        1,310,000

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