On January 1, 2016, Promo, Inc.purchased 70% of Set Corporation for $469,000.On that date the book value of the net assets of Set totaled $500,000.Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:
$$\begin{array} { l r r }
& \text { Book Value } & \text { Fair Value } \
\text { Inventory } & \$ 100,000 & \$ 120,000 \
\text { Land } & 75,000 & 85,000 \
\text { Equipment (useful life 4 years) } & 125,000 & 165,000
\end{array}$$ The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.

During 2016 Promo reported net income of $200,000 and Set had net income of $100,000.

What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?

Question

On January 1, 2016, Promo, Inc.purchased 70% of Set Corporation for $469,000.On that date the book value of the net assets of Set totaled $500,000.Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows: 
$$\begin{array} { l r r } 
& \text { Book Value } & \text { Fair Value } \
\text { Inventory } & \$ 100,000 & \$ 120,000 \
\text { Land } & 75,000 & 85,000 \
\text { Equipment (useful life 4 years) } & 125,000 & 165,000
\end{array}$$ The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.

During 2016 Promo reported net income of $200,000 and Set had net income of $100,000.

What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?

Quizplus · Accepted Answer

The sophisticated equity method considers the subsidiary's income and expenses in proportion to the parent's ownership interest. Promo owns 70% of Set, so it would include 70% of Set's net income in its own net income. Set had net income of $100,000, so Promo would include $70,000 (70% x $100,000) in its net income.

On January 1, 2016, Promo, Inc The Remaining Excess of Cost Over Book Value Was Allocated