Ceafoam Corporation acquired 80 percent of Trump Corporation's common stock on March 31, 20X4 for $360,000. At that date, the fair value of the noncontrolling interest was $90,000. On January 1, 20X4, Trump reported the following stockholders' equity balances:
Trump reported net income of $100,000 in 20X4, earned uniformly throughout the year, and declared and paid dividends of $40,000 on December 31, 20X4. Ceafoam reported retained earnings of $500,000 on January 1, 20X8, and had 20X4 income of $200,000 from its separate operations. Ceafoam paid dividends of $50,000 on December 31, 20X4. Ceafoam accounts for its investment in Trump Corporation using the fully adjusted equity method.
-Based on the information provided,what is the balance of Ceafoam's investment in Trump Corporation as of December 31,20X4?

Question

Ceafoam Corporation acquired 80 percent of Trump Corporation's common stock on March 31, 20X4 for $360,000. At that date, the fair value of the noncontrolling interest was $90,000. On January 1, 20X4, Trump reported the following stockholders' equity balances:
  Trump reported net income of $100,000 in 20X4, earned uniformly throughout the year, and declared and paid dividends of $40,000 on December 31, 20X4. Ceafoam reported retained earnings of $500,000 on January 1, 20X8, and had 20X4 income of $200,000 from its separate operations. Ceafoam paid dividends of $50,000 on December 31, 20X4. Ceafoam accounts for its investment in Trump Corporation using the fully adjusted equity method.
-Based on the information provided,what is the balance of Ceafoam's investment in Trump Corporation as of December 31,20X4?

Quizplus · Accepted Answer

The investment in Trump Corporation has to be adjusted for Ceafoam's share of Trump's net income and dividends declared during 20X4. 
Ceafoam's share of Trump's net income:
$100,000 x 80% = $80,000 
Ceafoam's share of Trump's dividends:
$40,000 x 80% = $32,000 
The investment in Trump Corporation balance as of December 31, 20X4:
$360,000 + $80,000 - $32,000 = $408,000 
The noncontrolling interest in Trump Corporation balance as of December 31, 20X4:
$90,000 + ($100,000 - $32,000) x 20% = $98,000 
The carrying amount of net assets in Trump Corporation balance as of December 31, 20X4:
$500,000 + $200,000 - $50,000 - $80,000 = $570,000 
The equity income recognized by Ceafoam for 20X4 is:
$570,000 x 80% = $456,000 
The balance of Ceafoam's investment in Trump Corporation after recognizing equity income is:
$408,000 - $456,000 = -$48,000 (There is a loss)
Since the equity method requires that the investment account cannot have a negative balance, the investment balance is limited to zero. Therefore, the correct answer is $388,000 ($360,000 + $80,000 - $32,000 + $0).

Ceafoam Corporation Acquired 80 Percent of Trump Corporation's Common Stock