Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: $\begin{array}{lrrr}&2014&2015&2016\
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$ Assume the EQUITY METHOD is applied.
Compute Pell's income from Demers for the year ended December 31, 2016.

Question

Quizplus · Accepted Answer

Pell's income from Demers for 2016 is calculated as 80% of Demers' net income for 2016, which is 80% of $130,000, equaling $104,000. However, we must also account for the amortization of the undervalued equipment and buildings. The total undervaluation is $70,000 ($30,000 + $40,000), which is amortized over 10 years, resulting in an annual amortization of $7,000. Pell's share of this amortization is 80%, which is $5,600. Therefore, Pell's income from Demers is $104,000 - $5,600 = $98,400.

Pell Company Acquires 80% of Demers Company for $500,000 on January