Zeng Jewelers purchased 3,000,000 of the outstanding 10,000,000 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 $8,000,000.The difference in fair value is a result of the higher fair value of equipment than it's 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

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The difference in fair value of $700,000 ($8,000,000 - $7,300,000) is due to equipment. Zeng owns 30% of Angel, so the share of the difference is $210,000 (30% of $700,000). This amount is depreciated over 25 years, resulting in an annual depreciation expense of $8,400 ($210,000 / 25), which decreases both the income from the investment and the investment account.

Zeng Jewelers Purchased 3,000,000 of the Outstanding 10,000,000 Shares of Angel