Peregrine Corporation acquired an 80% interest in Serine Corporation in 2011 at a time when Serine's book values and fair values were equal to one another.On January 1,2014,Serine sold a truck with a $55,000 book value to Peregrine for $100,000.Peregrine is depreciating the truck over 10 years using the straight-line method.The truck has no salvage value.Separate incomes for Peregrine and Serine for 2014 were as follows:
Peregrine's investment income from Serine for 2014 was

Question

Peregrine Corporation acquired an 80% interest in Serine Corporation in 2011 at a time when Serine's book values and fair values were equal to one another.On January 1,2014,Serine sold a truck with a $55,000 book value to Peregrine for $100,000.Peregrine is depreciating the truck over 10 years using the straight-line method.The truck has no salvage value.Separate incomes for Peregrine and Serine for 2014 were as follows: 
Peregrine's investment income from Serine for 2014 was

Quizplus · Accepted Answer

To calculate the investment income, we need to determine the earnings of Serine and then apply the appropriate percentage (80%) to arrive at the amount attributable to Peregrine.

Serine's income for 2014: 
Net income - gain on truck sale ($100,000 - $55,000)/10 = $8,500 
Total income = $199,000 + $8,500 = $207,500

Peregrine's share of income: 
$207,500 x 80% = $166,000

The investment income also includes the amortization of the excess purchase price (i.e. goodwill) associated with the acquisition:

Goodwill = purchase price - fair value of net assets acquired 
Assuming fair value = book value, no goodwill was recorded

Therefore, the investment income for Peregrine in 2014 is $166,000.

Peregrine Corporation Acquired an 80% Interest in Serine Corporation in 2011