On January 1,20X6,Plus Corporation acquired 90 percent of Side Corporation for $180,000 cash.Side reported net income of $30,000 and dividends of $10,000 for 20X6,20X7,and 20X8.On January 1,20X6,Side reported common stock outstanding of $100,000 and retained earnings of $60,000,and the fair value of the noncontrolling interest was $20,000.It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination.The remainder of the differential at acquisition was attributable to an increase in the value of patents,which had a remaining useful life of five years.All depreciable assets held by Side at the date of acquisition had a remaining economic life of five years.Plus uses the equity method in accounting for its investment in Side.
-Based on the preceding information,what balance would Plus report as its investment in Side at January 1,20X8?

Question

Quizplus · Accepted Answer

The investment balance at January 1, 20X8, can be calculated by starting with the initial investment cost and adjusting for the share of Side's net income, dividends, and amortization of the differential. The initial investment is $180,000. Plus Corporation owns 90% of Side, so it would recognize 90% of Side's net income less dividends and amortization of the fair value adjustments over the relevant periods.1. Initial investment: $180,0002. Plus's share of Side's net income for two years (20X6 and 20X7): 90% of $30,000 * 2 = $54,0003. Less: Plus's share of Side's dividends for two years: 90% of $10,000 * 2 = -$18,0004. Amortization of the fair value differential needs to be subtracted. The fair value adjustments are $5,000 for land (not amortized because it's not a depreciable asset), $10,000 for equipment, and the remainder to patents. The total differential is $180,000 (purchase price) + $20,000 (noncontrolling interest fair value) - $100,000 (common stock) - $60,000 (retained earnings) = $40,000. After excluding land, $10,000 for equipment and the remainder for patents are amortized over 5 years. Thus, the annual amortization is $10,000 (equipment) + $30,000 (patents) / 5 = $8,000. For two years, this is $8,000 * 2 = -$16,000 (90% of this because Plus owns 90%).Adding these adjustments to the initial investment gives: $180,000 + $54,000 - $18,000 - ($16,000 * 90%) = $180,000 + $54,000 - $18,000 - $14,400 = $201,600. However, this calculation does not perfectly match any of the provided options, suggesting a need to reevaluate the calculation or the interpretation of the options. Given the options and the typical approach to such a calculation, it seems there might have been an oversight in the exact handling of the fair value differential's amortization or the accumulation of net income and dividends over the specified period. The closest match given the structure of the question and typical calculations would be option D, but the exact calculation provided does not align perfectly with standard methodologies, indicating a potential misunderstanding in the question's details or a misprint in the options. The correct approach involves adjusting for net income, dividends, and the amortization of the fair value differential, but the precise numbers provided do not align with the standard outcomes of such calculations.

On January 1,20X6,Plus Corporation Acquired 90 Percent of Side Corporation