Kaye Company acquired 100% of Fiore Company on January 1, 2021. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2021 and paid dividends of $100.Assume the equity method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore's operations?
A) $400
B) $300
C) $380
D) $280
E) $480

Question

Quizplus · Accepted Answer

Kaye's equity income is 90% of Fiore's net income, or $360. However, because Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year, Kaye must also reduce its equity income by $20. Therefore, Kaye's equity income is $360 - $20 = $380.

Kaye Company Acquired 100% of Fiore Company on January 1