On January 1, 2017, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2017 Slume reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity method. What amount of investment income will be reported by Puma for the year 2017?

Question

Quizplus · Accepted Answer

Puma's investment income from Slume for 2017 is calculated as follows: Puma owns 30% of Slume, so it would recognize 30% of Slume's net income ($25,000) which is $7,500. However, the fair value of Slume's net assets was $50,000 more than the book value, attributable to buildings with a 10-year life. This excess value of $50,000 is amortized over 10 years, resulting in an annual amortization of $5,000. Puma must recognize 30% of this amortization as a reduction in its investment income, which is $1,500 ($5,000 * 30%). Therefore, Puma's investment income from Slume is $7,500 (initial share of net income) - $1,500 (share of amortization) = $6,000.

On January 1, 2017, Puma Corporation Acquired 30 Percent of Slume