In January of 2011, Clyde Corporation acquired 20% of the outstanding voting common stock of Blake Company for $280,000. This investment enabled Clyde to exercise significant influence over Blake. The book value of the acquired shares was $210,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Blake's balance sheet and that had a remaining useful life of 10 years.
For the year ended December 31, 2011, Blake reported income of $63,000 and paid cash dividends of $14,000 on its common stock. What is the proper carrying value of Clyde's investment in Blake at December 31, 2011?

Question

Quizplus · Accepted Answer

The carrying value of Clyde's investment will be calculated using the equity method. Under the equity method, the investment is recorded at cost initially and subsequently adjusted for the investor's share of the investee's earnings or losses and any dividends paid.

Initial cost of investment = $280,000
Excess of cost over book value = $280,000 - $210,000 = $70,000
This excess amount is attributed to an identifiable intangible asset with a remaining useful life of 10 years. Therefore, the annual amortization expense will be ($70,000 / 10 years) = $7,000

Clyde's share of Blake's income = 20% * $63,000 = $12,600
Clyde's share of dividends received = 20% * $14,000 = $2,800
Clyde's share of amortization expense = 20% * $7,000 = $1,400

Carrying value of investment at December 31, 2011 = Initial cost + Share of earnings - Share of dividends - Share of amortization expense
= $280,000 + $12,600 - $2,800 - $1,400
= $288,400

However, since the question asks for the proper carrying value, we need to consider impairment. If there are any indications of impairment, we need to adjust the carrying value accordingly. In this case, there is no indication of impairment mentioned in the question. Therefore, the proper carrying value of Clyde's investment in Blake at December 31, 2011 is $282,800 (Option D).

In January of 2011, Clyde Corporation Acquired 20% of the Outstanding