Scenario 3-2
On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
-Refer to Scenario 3-2. What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?

Question

Scenario 3-2
On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:
  The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
-Refer to Scenario 3-2. What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?

Quizplus · Accepted Answer

Under the sophisticated equity method, Promo would recognize $70,000 of net income from Set (70% x $100,000). In addition, Promo would recognize its share of the excess amortization of the patent, which is $3,100 ($31,000/10 x 70%). Therefore, consolidated net income would be $273,100 ($200,000 + $70,000 + $3,100).

Scenario 3-2 On January 1, 20X1, Promo, Inc. Purchased 70% of Set