Answer:
1. Equity valuation in 2018/= $108,100
2. Net income based on fair value = $7,900
Answer:
A. Equity valuation
2017 net income:
Net income = 40% x $41,750 = $16,700
Less dividend = 40% x $14,000 = -$5,600
Net transferrable income = $11,100
2018 net income:
Net income = 40% x $64,000 = $25,600
Less dividend = 40% x $19,000 = -$7,600
Net transferrable income = $18,000
Investment Valuation:
Year 0 = $79,100
Year 1 = $79,000 + $11,100 = $90,100
Year 2 = $90,100 + $18,000 = $108,100
B.
Fair Valuation method
Closing valuation = $99,000
Less Opening valuation = $91,900
Income recognized in 2018 = $7,100
Explanation:
The equity method of investment valuation requires that the Net Income accruing to the Investee be added to his investment cost and the dividend thereof (if any) be deducted from the same. This gives an equity valuation of the invested sum
fair value on the other hand is based upon the understanding of the market by the parties to a deal; and it's a value the market is thus willing to give in exchange for the shares in hand.
