Question

Evan Company reports net income of $140,000 each year and declares an annual cash dividend of $50,000. The company holds net assets of $1,200,000 on January 1, 2017. On that date, Shalina purchases 40 percent of Evan's outstanding common stock for $600,000, which gives it the ability to significantly influence Evan. At the purchase date, the excess of Shalina's cost over its proportionate share of Evan's book value was assigned to goodwill. On December 31, 2019, what is the Investment in Evan Company balance (equity method) in Shalina's cost over its proportionate share of Evan's book value was assigned to goodwill. On December 31st, what was the investment in Evan company balance (equity method) in Shalina's record?a. $600,000b. $660,000c. $690,000d. $708,000

Answer 1

Answer:

D. $708,000

Explanation:

Step 1: Calculate the Value in excess of Cost over book value for the acquistion

a. Shalina Purchased 40% or Evans outstanding stock for $600,000

b. Evan's  net assets was $1,200,000 on that same January 1, 2017

To calculate the excess value

Evan's Net Assets                                                                         $1,200,000

The Book value of Shalina's acquisition ( 40% x $1,200,000)   $480,000

Subtract: The Cost of Acquisition by Shalina                             ($600,000)

Total = Excess of Cost over Book Value for Acquisition              $120,000

This excess is Assigned to Goodwill                                              $120,000

Calculate Goodwill Amortization

= Excess of Cost over book value- Goodwill = $0 (since all were assigned to Goodwill)

Step 2: Calculate the Investment of Shalina in Evan's Company as at 31st December, 2019

Investment Cost by Shalina                                                              $600,000

Portion of 2017 Income accrued to Shalina (40% of $140,000)      $56,000

Subract: Shalina Portion of Dividend declared (40% of $50,000) ($20,000)

Portion of 2018 Income accrued to Shalina (40% of $140,000)      $56,000

Subract: Shalina Portion of Dividend declared (40% of $50,000) ($20,000)

Portion of 2019 Income accrued to Shalina (40% of $140,000)      $56,000

Subract: Shalina Portion of Dividend declared (40% of $50,000) ($20,000)

Shalina's Investment in Evan as at 31st December, 2019            $708,000

Note: Since, Evans company declares the same profit of $140,000 and dividend of $50,000 yearly, it means Shalina's portion of investment should be calculated based on these same figures for the three years.