On January 1, 2018, Como Company purchased 45% of the outstanding common shares

Question

On January 1, 2018, Como Company purchased 45% of the outstanding common shares of the Lite Company for $200,000. The net assets of Lite Company totaled $400,000. The inventory had a book value of $100,000 and a fair value of $120,000. Excess cost attributable to inventory is written off in 2018. During 2018, Lite Company earned $200,000 and declared a dividend of $40,000 for the year.

The fair value of the Lite stock investment at the end of 2018 was $210,000. Which of the following amounts are correct assuming that Como elected to use the fair value option to account for the Lite investment?2018 December 31, 2018 Income carrying value

Multiple Choice

$28,000 $210,000

$81,000 $263,000

$91,000 $273,000

$18,000 $210,000

Explanation / Answer

carrying value = fair value at end of year= 210000

Income = dividend income received + fair value adjustment

Dividend received= 40000*45%= 18000

fair value adjustment:= fair value - cost = 210000- 200000= 10000

Income = 18000+10000= 28000

Hence, first option is correct

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