Question

On January 3, 2018, Matteson Corporation acquired 40 percent of the outstanding common stock of O’Toole Company for $1,379,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $863,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2018, O’Toole reported net income of $353,000 and declared cash dividends of $35,000. At December 31, 2018, what should Matteson report as its investment in O’Toole under the equity method?

Answer 1

Answer:

total investment (net)      1,454,6‬00

Explanation:

40% acqired for      1,379,000

book value               (863,000)

excess of value / copyrights   516,000

useful life of the copyrights: 10 years

depreciation per year: 516,000 / 10 = 51,600

net income 353,000 x 40%      =   141,200

cash dividends 35,000 x 40%  =   (14,000)  

investment account increase        127,200

beginning balance                         863,000  

year-end                                         990,200

copyrights                                      516,000

amortization on copyrights            (51,600)

year-end copyrights                      464,400

investment on O'Toole    990,200

copyrights                        464,400  

total investment (net)      1,454,6‬00