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14 July, 13:05

Sage, Inc. bought 40% of Adams Corp.'s outstanding common stock on January 2, 1991, for $400,000. The carrying amount of Adams' net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during 1991. During 1991, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31, 1991?

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  1. 14 July, 13:33
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    income statment

    48,000 gain on adams investment

    (6,000) amortization expense

    42,000 net

    Explanation:

    900,000 x 40% = 360,000

    plant 90,000 x 40% = 36,000

    inventory 10,000 x 40% = 4,000

    Total goodwill 40,000

    amortization of goodwill:

    36,000/18 = 2,000

    inventory 4,000

    total 6,000

    net income 120,000 x 40% = 48,000

    cash dividends 20,000 x 40% = 8,000

    balance sheet:

    360,000 + 48,000 - 8,000 = 400,000 Adams Investment

    40,000 - 6,000 = 34,000 Goodwill

    net vlaue 434,000

    income statment

    48,000 gain on adams investment

    (6,000) amortization expense

    42,000 net
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