In January 2011, Henry Corporation acquired 20 percent of the outstanding common stock of Davis Company for $1,120,000. This investment gave Henry the ability to exercise significant influence over Davis. The book value of the acquired shares was $840,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Davis's balance sheet and that had a remaining useful life of ten years. For the year ended December 31, 2011, Davis reported net income of $252,000 and paid cash dividends of $56,000 on its common stock. What is the proper carrying value of Henry's investment in Davis at December 31, 2011?

Question

Quizplus · Accepted Answer

The carrying value is calculated as the initial investment plus Henry's share of Davis's net income minus Henry's share of dividends received, adjusted for amortization of the intangible asset. Initial investment: $1,120,000. Share of net income: 20% of $252,000 = $50,400. Share of dividends: 20% of $56,000 = $11,200. Excess cost amortization: ($1,120,000 - $840,000) / 10 = $28,000. Carrying value = $1,120,000 + $50,400 - $11,200 - $28,000 = $1,131,200.

In January 2011, Henry Corporation Acquired 20 Percent of the Outstanding