Question

Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2017, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2017 and $50,000 in 2018 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2017 and $47,000 in 2018 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2018, if the equity method has been applied?
A, $286,000
B, $296,000
C, $276,000
D, $344,000
E, $300,000

Answer 1

Answer:

A, $286,000

Explanation:

Whenever there is equity method followed, for accounting of subsidiary then entire income and dividends received are accounted for in the cost of investment.

Here cost = $257,000

Add: all the incomes of Merriam = $40,000 + $47,000 = $87,000

Less: Any dividends received = $10,000 + $10,000 = $20,000

Less: Amortization = $19,000 + $19,000 = $38,000

Therefore, total carrying value = $257,000 + $87,000 - $20,000 - $38,000

= $286,000

In equity method therefore, carrying value on December 31, 2018 = $286,000

Final Answer

A, $286,000

Answer 2

Answer:

As of December 31,2018 , the investment in Merriam co in books of Jansen's would be  A) $286,000

Explanation:

It is told in the question that the equity method is to be applied , when taking out the amount of investment in Merriam co, so here all the income that Jansen will get from Merriam would be added and all the amortization expense and dividend declared by Merriam would be deducted fro taking out the total amount investment in Merriam.

INVESTMENT = Book value from acquiring common stock

                                            +

                          Net income of year 2017

                                            -

                          Dividend declared in 2017

                                             -

                          Amortization expense of 2017

                                             +

                          Net income of year 2018

                                              -

                          Dividend declared in 2018

                                              -

                           Amortization expenses of 2018

= $257,000 + $40,000 - $10,000 - $19,000 + $47,000 - $10,000 - $19,000

= $286,000