Zeng Jewelers purchased 6,000,000 of the outstanding 20,000,000 shares of Angel & Associates. Zeng has significant influence over Angel, so Zeng will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $7,800,000. The difference in fair value is a result of the higher fair value of equipment than its book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, how will Zeng record the difference in net assets for this investment on 12/31?

Question

Quizplus · Accepted Answer

The difference in fair value due to equipment is $500,000 ($7,800,000 - $7,300,000). Zeng's share is 30% (6,000,000/20,000,000), so $150,000. This amount is depreciated over 25 years, resulting in an annual expense of $6,000, reducing both the Income from Investment and the Investment account.

Zeng Jewelers Purchased 6,000,000 of the Outstanding 20,000,000 Shares of Angel