In January 2014,Albert Corporation acquired 20 percent of the outstanding common stock of Peter Company for $1,120,000.This investment gave Albert the ability to exercise significant influence over Peter.The book value of the acquired shares was $840,000.The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Peter's balance sheet and that had a remaining useful life of ten years.For the year ended December 31,2014,Peter reported net income of $252,000 and paid cash dividends of $56,000 on its common stock.What is the proper carrying value of Albert's investment in Peter at December 31,2014?

Question

Quizplus · Accepted Answer

First, we need to determine the initial cost of the investment, which was $1,120,000. Since Albert acquired only 20% of Peter, the total net income attributable to Albert would be $50,400 ($252,000 x 20%). We deduct the dividends from net income to get the ending balance in retained earnings, which is $196,000 ($252,000 - $56,000).

Next, we need to calculate the carrying value of the investment. The book value of the investment was $840,000, and since Albert has significant influence, we use the equity method of accounting. This means that we need to adjust our investment for our share of Peter's net income, which is $50,400, and decrease it by our share of Peter's dividends paid, which is $11,200 ($56,000 x 20%).

Carrying value of investment = (Initial cost + investor's share of investee's income) - investor's share of dividends
= ($1,120,000 + $50,400) - $11,200
= $1,159,200

Finally, we need to adjust our carrying value for the intangible asset that we identified. Since the intangible asset has a remaining useful life of ten years, we use straight-line depreciation to determine the amortization expense for the year. The amortization expense is $28,000 ($280,000 / 10 years).

Adjusted carrying value of investment = Carrying value of investment - amortization expense
= $1,159,200 - $28,000
= $1,131,200

In January 2014,Albert Corporation Acquired 20 Percent of the Outstanding