Peacoat Corporation acquired 80 percent of Sweater 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,Sweater reported the following stockholders' equity balances:
Sweater 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.Peacoat reported retained earnings of $500,000 on January 1,20X8,and had 20X4 income of $200,000 from its separate operations.Peacoat paid dividends of $50,000 on December 31,20X4.Peacoat accounts for its investment in Sweater Corporation using the fully adjusted equity method.
-Based on the information provided,what is the balance of Peacoat's investment in Sweater Corporation as of December 31,20X4?

Question

Peacoat Corporation acquired 80 percent of Sweater 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,Sweater reported the following stockholders' equity balances:
  Sweater 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.Peacoat reported retained earnings of $500,000 on January 1,20X8,and had 20X4 income of $200,000 from its separate operations.Peacoat paid dividends of $50,000 on December 31,20X4.Peacoat accounts for its investment in Sweater Corporation using the fully adjusted equity method.
-Based on the information provided,what is the balance of Peacoat's investment in Sweater Corporation as of December 31,20X4?

Quizplus · Accepted Answer

Under the fully adjusted equity method, the investment balance is adjusted for the investor's share of the investee's net income and dividends. Also, the fair value of the non-controlling interest is recorded separately on the investor's balance sheet.

Investor's share of Sweat equity as of March 31, 20X4 = $300,000 (80% x $375,000)

Fair value of non-controlling interest as of March 31, 20X4 = $90,000

Total investment as of March 31, 20X4 = $390,000 ($300,000 + $90,000)

Sweat's net income for 20X4 = $100,000
Peacoat's share of income = $80,000 (80% x $100,000)

Sweat's dividend for 20X4 = $40,000
Peacoat's share of dividend = $32,000 (80% x $40,000)

Investment balance as of December 31, 20X4 = $388,000 ($390,000 + $80,000 - $32,000 - $50,000)

Peacoat Corporation Acquired 80 Percent of Sweater Corporation's Common Stock