Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000. At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:
During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company.

-Based on the preceding information,what was the balance in the investment account reported by Vision on January 1,20X9,before its sale of shares?

Question

Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000. At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:
During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company.
 
-Based on the preceding information,what was the balance in the investment account reported by Vision on January 1,20X9,before its sale of shares?

Quizplus · Accepted Answer

The initial investment in Meta was made for $225,000, and the fair value of the noncontrolling interest was $75,000. Therefore, the total fair value of Meta at the acquisition date was $300,000. Since Vision acquired 75% of the stock, their share of the net assets would be 75% of $240,000 ($320,000 - $80,000 goodwill) which equals $180,000.

After the acquisition, Vision would recognize its share of Meta's net income each year, which would be $22,500 ($30,000 x 75%). Also, Vision would recognize its share of Meta's dividends, which would be $7,500 ($10,000 x 75%). Thus, the investment account balance at the end of 20X8 would be:
Initial investment + share of net income - share of dividends = $225,000 + ($22,500 x 3) - ($7,500 x 3) = $255,000

Therefore, on January 1, 20X9, the balance in the investment account reported by Vision before its sale of shares would be $255,000.

Vision Corporation Acquired 75 Percent of the Stock of Meta