Question

In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $889,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $4,808,000 with liabilities of $968,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2017, Martes reported net income of $225,000. In 2018, Martes reported net income of $276,250. Dividends of $104,000 were declared in each of these two years. What is the equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2018?

Answer 1

Answer:

$923,450

Explanation:

The question is to calculate the equity method balance of Domingo's investment in Martes. Inc at December 31,2015

Step 1: Determine the amortization of patents

Particulars                                                 Amount

Martes Inc Assets' Book Value             $4,808,000

Subtract: Liabilities                                    ($968,000)

Martes Inc Net Assets Book Value       $3,840,000

20% Voting Stock Book Value                  $768,000

(20% of $3,840,000)                  

Subtract: Purchase cost of the 20%         ($889,000)

Excess of Cost over book value                $121,000

Patent (the excess above)                          $121,000

Amortization of the patent in 10 years = $121,000/10 years = $12,100

Step 2: Calculate the Equity Investment of Domingo Inc

Particulars                                                                       Amount

Cost of Investment                                                        $889,000

Income accrued 2017 (0.2 x $225,000)                       $45,000

Subtract: Declared dividend (0.2 x $104,000)              ($20,800)

Income Accrued 2018 (0.2 x $276,250)                        $55,250

Subtract: Patent Amortization                                         ($12,100)

Subtract: Dividend declared 2018 (0.2 x $104,000)      ($20,800)

Subtract: Patent Amortization                                         ($12,100)

Domingo Inc's Investment in Martes Inc                        $923,450