Crush Enterprises purchased 200,000 of the 400,000 outstanding shares of Carly Casualties for $4,400,000 on 1/1/19. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,200,000. What is the balance in the Investment in Carly account at year end?

Question

Quizplus · Accepted Answer

The initial investment is $4,400,000. Crush's share of Carly's net income is 50% of $1,200,000, which is $600,000. The amortization of the excess fair value of equipment is $25,000 (50% of $500,000/10 years). Dividends received are $62,500 (50% of $125,000). The year-end balance is $4,400,000 + $600,000 - $25,000 - $62,500 = $4,912,500.

Crush Enterprises Purchased 200,000 of the 400,000 Outstanding Shares of Carly