On January 1, 2020, Sylvestor, Inc., paid $400,000 for a 20% interest in Happiness Corporation. This investee had assets with a book value of $1,500,000 and liabilities of $700,000. A patent held by Happiness was undervalued by $150,000. The patent had a ten year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Happiness reported income of $200,000 and paid dividends of $80,000 while in 2021 it reported income of $230,000 and dividends of $100,000. What is the balance in Equity Investment at December 31, 2021?

Question

Sage Morrow

Business

24 March, 12:32

On January 1, 2020, Sylvestor, Inc., paid $400,000 for a 20% interest in Happiness Corporation. This investee had assets with a book value of $1,500,000 and liabilities of $700,000. A patent held by Happiness was undervalued by $150,000. The patent had a ten year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Happiness reported income of $200,000 and paid dividends of $80,000 while in 2021 it reported income of $230,000 and dividends of $100,000. What is the balance in Equity Investment at December 31, 2021?

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Dominick Coleman · Answer 1

= $444,000

Explanation:

Fair value of investee's assets = $1,500,000 + $150,000 = $1,650,000

Equity value = $1,650,000 - $700,000 = $950,000

Fair value of equity acquired = $950,000 * 20% = $190,000

Goodwill resulting from the acquisition = $400,000 - $190,000 = $210,000

Barney has to recognize additional amortization on the patent with 10 years remaining life.

Annual amortization expense = $150,000/10 * 20% = $3,000

Balance in investment account at the end of 2020 = beginning balance + net income * 20% - dividends paid * 20% - amortization expense

$400,000 + $200,000 * 20% - $80,000 * 20% - $3,000 = $421,000

investment account (2021) = $421,000 + $230,000 * 20% - $100,000 * 20% - $3,000

= $444,000