On January 1, 2020, Cullumber Co. purchased 25,000 shares (a 10% interest) in Elton John Corp. for $1,450,000. At the time, the book value and the fair value of John's net assets were $12,000,000.

On July 1, 2021, Cullumber paid $3,330,000 for 50,000 additional shares of John common stock, which represented a 20% investment in John. As a result of this transaction, Cullumber owns 30% of John and can exercise significant influence over John's operating and financial policies. (Any excess fair value is attributed to goodwill.)

John reported the following net income and declared and paid the following dividends.

Net Income Dividend per Share

Year ended 12/31/20 $690,000 None

Six months ended 6/30/21 480,000 None

Six months ended 12/31/21 800,000 $1.55

Determine the ending balance that Cullumber Co. should report as its investment in John Corp. at the end of 2021.

Answer: $5,020,750

Explanation:

In 2020, Cullumber Co. owned 10% of Elton John Corp and Elton John Corp paid no dividends.

This means that Cullumber Co is entitled to 10% of that.

= 690,000 * 10%

= $69,000

This means the total amount of investment is now,

= 1,450,000 + 69,000

= $1,519,000

Before 1st July, John realised income of $480,000 of which Cullumber has 10% so that's,

= 480,000 * 10%

= 48,000

Total investment is now

= 1,519,000 + 48,000

= $1,567,000

Cullumber then invested a further $3,330,000 bringing the total value to,

= 3,330,000 + 1,567,000

= $4,897,000

Cullumber now owns 30% and will therefore own 30% of the next income which is $800,000

= 800,000 * 30%

= $240,000

This brings the total to,

= $4,897,000 + 240,000

=$5,137,000

Dividends were declared which reduced the balance to the tune of,

= 1.55 * (no. Of shares owned)

= 1.55 * (50,000 + 25,000)

= 1.55 * (75,000)

= $116,250

Bringing the total to,

=$5,137,000 - 116,250

= $5,020,750

The ending balance that Cullumber Co. should report as its investment in John Corp. at the end of 2021 is $5,020,750.