Exhibit 13-2
On January 1, 2017, the Clutz Company purchased 30% of the 1,000,000 shares of Nancy's common stock for
$15,000,000 when 30% of Nancy's net assets totaled $12,000,000. The excess of purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years. Nancy reported net income of $8,000,000 and paid cash dividends of $2,000,000 during 2017.
-Refer to Exhibit 13-2. What should the income reported by Clutz during 2017 from its investment in the Nancy Company be?

Question

Quizplus · Accepted Answer

Clutz owns 30% of Nancy, so it should recognize 30% of Nancy's net income ($8,000,000 * 30% = $2,400,000). However, the excess purchase price over the net assets ($3,000,000) attributable to undervalued plant assets should be amortized over their useful life (10 years), which is $300,000 per year ($3,000,000 / 10). This amortization reduces the income recognized from the investment, so the income reported by Clutz is $2,400,000 - $300,000 = $2,100,000.

Exhibit 13-2 on January 1, 2017, the Clutz Company Purchased 30% of 30