Question

On July 1, 20X8, Pair Logic Corporation acquires 75 percent of Systems Inc. common stock for its underlying book value. At the time of acquisition, the fair value of the noncontrolling interest is equal to its proportionate share of book value of Systems. On January 1, 20X8 Systems reported common stock of $100,000 and retained earnings of $130,000. For the year 20X8, Systems reports the following items:
Before combinaiton (January 1 to June 30) After combination (July 1 to December 31)
Sales $150,000 $160,000
Cost of Goods Sold 90,000 93,000
Depreciation Expense 20,000 20,000
Other Expenses 15,000 17,000
Net Income 25,000 30,000
Dividends 15,000 18,000

Pair Logic uses the equity method in accounting for this investment. Based on the preceding information, what is the book value of shares acquired by Pair Logic on July 1, 20X8?

a. 191,250
b. 230,000
c. 240,000
d. 180,000

Answer 1

Answer: d. $180,000

Explanation:

Using the equity method, the book value of shares is:

= (Opening common stock + Retained earnings + Net Income - Dividends ) * Percentage of shares acquired by Pair Logic

= (100,000 + 130,000 + 25,000 - 15,000) * 75%

= 240,000 * 75%

= $180,000