Question

Sheet Company reported the following net income and dividends for the years indicated: Year Net Income Dividends 20X5 $ 35,000 $ 12,000 20X6 45,000 20,000 20X7 30,000 14,000 Pillow Corporation acquired 75 percent of Sheets common stock on January 1, 20X5. On that date, the fair value of Sheet net assets was equal to the book value. Pillow uses the equity method in accounting for its ownership in Sheet and reported a balance of $259,800 in its investment account on December 31, 20X7. Required: a. What amount did Pillow pay when i

Answer 1

Answer:

A. $211,800

B. $282,400

C. $70,600

D. $ 86,600

Explanation:

A. Calculation for the amount that True pay when it purchased Exacto’s shares

Balance in investment account, December 31, 20x7$259,800

Cumulative earnings since acquisition$110,000

Less Cumulative dividends since acquisition(46,000)

Total$64,000

($110,000-46,000)

×Proportion of stock held by True Corporation 0.75

=Total amount debited to Investment account(48,000)

(64,000*0.75)

Purchase amount on January 1, 20X5$211,800

($259,800-$48,000)

B. Calculation for the fair value of Exacto’s net assets on January 1, 20X5

True Corporation’s Purchase amount$211,800

÷True Corp.’s percentage 0.75

=Fair Value of Exacto Company’s Net Assets$282,400

($211,800÷0.75)

C. Calculation for What amount was assigned to the NCI shareholders on January 1, 20X5

Fair Value of Exacto Company’s Net Asset$282,400

×Exacto Company’s percentagex0.25

=NCI’s portion$70,600

($282,400×0.25)

D. Calculation forWhat amount will be assigned to the NCI shareholders

True Corp’s investment balance$259,800

True Corp’s percentage÷0.75

=Fair Value of Exacto’s Net Assets 20X7 $346,400

×Exacto Company’s percentage 0.25

=NCI’s Portion, December 31, 20X7$ 86,600

($346,400×0.25)