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 financial records?

Answer 1

Answer:

$708,000

Explanation:

The computation of Investment in Evan Company balance is shown below:-

Purchase of Evan stock = $600,000

Book Value of Evan Stock = Net assets - Given percentage

= $1,200,000 x 40%

= $480,000

Goodwill = Purchase of Evan stock - Book Value of Evan Stock

= $600,000 - $480,000

= $120,000

Life of Goodwill is Indefinite

Annual Amortization is Zero

Cost = $600,000

Income Accrued 2017 = Net income × Given percentage

= $140,000 x 40%

= $56,000

Dividend 2017 = Cash dividend × Given percentage

= $50,000 x 40%

= $20,000

Income Accrued 2018

= $140,000 x 40%

= $56,000

Dividend 2018

$50,000 x 40%

= $20,000

Income Accrued 2019

= $140,000 x 40%

= $56,000

Dividend 2019

$50,000 x 40%

= $20,000

Equals Investment in Evan, 31/12/2019 = Purchase of Evan stock + Income Accrued 2017 - Dividend 2017 + Income Accrued 2018 - Dividend 2018 + Income Accrued 2019 - Dividend 2019

= $600,000  + $56,000 - 20,000 + 56,000 - 20,000 + 56,000 - 20,000

= $708,000