REFERENCE: Ref.01_04
On January 1,2008,Dawson,Incorporated,paid $100,000 for a 30% interest in Sacco Corporation.This investee had assets with a book value of $550,000 and liabilities of $300,000.A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life.Any goodwill associated with this acquisition is considered to have an indefinite life.During 2008,Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000.Assume Dawson has the ability to significantly influence the operations of Sacco.
-The equity in income of Sacco for 2008,is

Question

Quizplus · Accepted Answer

Dawson purchased a 30% interest in Sacco for $100,000, which gives them significant influence over Sacco's operations. The equity method is used to account for investments where the investor has significant influence. Under the equity method, Dawson records its share of Sacco's income and dividends as follows:
- Equity in income of Sacco for 2008: 30% x $50,000 = $15,000
- Dividends received from Sacco in 2008: 30% x $20,000 = $6,000
Therefore, Dawson's net income from its investment in Sacco for 2008 is $15,000 - $6,000 = $9,000.
Note that the value of Sacco's patent is not relevant for the equity method calculation, as it only affects the carrying amount of Sacco's assets and liabilities. Any excess of the purchase price over the carrying amount of net assets acquired is recognized as goodwill, which has an indefinite life and is not amortized under the equity method.

REFERENCE: Ref.01_04 On January 1,2008,Dawson,Incorporated,paid $100,000 for a 30% Interest in Sacco