Question

On january 3, 2021, matteson corporation acquired 40 percent of the outstanding common stock of o’toole company for $1,160,000. This acquisition gave matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $820,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended december 31, 2021, o’toole reported net income of $260,000 and declared cash dividends of $50,000. On december 31, 2021, what should matteson report as its investment in o’toole under the equity method?.

Answer 1

The amount that matteson  will report as its investment in o’toole under the equity method is: $1,210,000.

Investment under equity method

First step

Net Income $104,000

($260,000× 40%)

Amortization of excess  ($34,000)

[ ($1,160,000 - $820,000)/10 years]

Equity in Income $70,000

Second step

Investment $1,160,000

Equity income $70,000

Dividend  ($20,000)

($50,000× 40%)

Investment in O'Toole $1,210,000

Therefore the amount that matteson  will report as its investment in o’toole under the equity method is: $1,210,000.

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