Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011?

Question

Quizplus · Accepted Answer

The adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011, is a debit of $16,500. This is calculated as follows:Beginning balance of Investment in Stanley Corporation (10% ownership) = $90,000Net income of Stanley Corporation for 2010 = $215,000Renfroe's share of Stanley's net income (10%) = $21,500Dividends received from Stanley Corporation = $50,000Renfroe's share of Stanley's dividends (10%) = $5,000Adjustment to Investment in Stanley Corporation = $21,500 - $5,000 = $16,500