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 balance in the investment in Sacco account at December 31,2008,is

Question

Quizplus · Accepted Answer

The balance in the investment in Sacco account at December 31, 2008, can be calculated using the equity method as follows:

Investment in Sacco (Jan 1, 2008) = $100,000

Income reported by Sacco in 2008 = $50,000 x 30% = $15,000

Dividends paid by Sacco in 2008 = $20,000 x 30% = $6,000

Investment in Sacco (Dec 31, 2008) = Investment in Sacco (Jan 1, 2008) + Income reported by Sacco in 2008 - Dividends paid by Sacco in 2008
= $100,000 + $15,000 - $6,000
= $109,000

Therefore, the correct answer is D) $107,500, the closest option to the calculated amount.

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