Exhibit 13-2 On January 1, 2014, the Cluzt Company purchased 30% of the 1,000,000 shares of Nancy's common stock for $15,000,000 when 30% of Nancy's net assets totaled $12,000,000. The excess purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years. Nancy reported net income of $8,000,000 and paid cash dividends of $2,000,000 during 2014.
-Refer to Exhibit 13-2. The income reported by Clutz during 2014 from its investment in the Nancy Company should be

Question

Quizplus · Accepted Answer

Cluzt Company owns 30% of Nancy, so it uses the equity method. Cluzt's share of Nancy's net income is 30% of $8,000,000, which is $2,400,000. However, Cluzt must also account for the excess purchase price amortization related to the undervalued plant assets. The excess purchase price is $3,000,000 ($15,000,000 - $12,000,000), and the annual amortization is $300,000 ($3,000,000 / 10 years). Therefore, the income reported is $2,400,000 - $300,000 = $2,100,000.

Exhibit 13-2 on January 1, 2014, the Cluzt Company Purchased