Question

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. How much income did Harley report from Bike for 2012?
a) $120,000.
b) $300,000.
c) $200,000.
d) $500,000.
e) $320,000.

Answer 1

Answer:

e) $320,000

Harley's income from Bike in 2012= Harley's investment in Bike * Net Income of Bike in 2012 + Dividend Income share of Harley received from Bike in 2012

= 0.4 or 40% * $ 500,000 + 0.4 or 40% * $ 300,000

= $ 200,000 + $ 120,000 = $ 320,000

Explanation:

For computing Harley's income from Bike in 2012, we should find the Harley's income from Bike from the two sources given in the problem i.e.

1. Net Income of Bike in 2012
2. Dividend Paid by Bike in 2012

The Net Income of Bike in 2012 = $ 500,000

Therefore, Harley's Net Income share in Bike of 2012 = 0.4 or 40% * $ 500,000 (As Harley's investment in Bike is 0.4 or 40%).

= $ 200,000 - (Part A)

Dividend income of Harley from Bike in 2012 = 0.4 or 40% * $ 300,000

= $ 120,000 - (Part B)

Adding Part A and Part B we get the answer of $ 320,000.