Question

Emily Corporation purchased all of Ace Company's common stock on January 1, 2020, for $1,000,000 cash. The investee's stockholders' equity amounted to $400,000. The excess of $600,000 was due to an unrecorded patent with a six-year life. In 2020, Ace reported net income of $250,000 and paid dividends of $25,000.
For 2020, what amount of Equity Income will Emily record? How to get the answer of 1,125,000

Answer 1

Answer:

$ 1,125,000

Explanation:

Calculation for the amount of Equity Income that Emily will record

First step is to find the Net equity income using this formula

Net equity income= Net income +Dividends

Let plug in the formula

Net equity income=$250,000+$25,000

Net equity income=$225,000

Second step is to find the balance of investment using this formula

Balance of investment= (Common stock + Net equity income )- Amortization of unrecorded patent

Let plug in the formula

Balance of investment =($1,000,000+$225,000 )-($600,000/6)

Balance of investment=$1,225,000-$100,000

Balance of investment = $ 1,125,000

Therefore the amount of Equity Income that Emily will record will be $ 1,125,000