ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750.
ABC Inc. uses the equity method to account for its investment in 123 Inc.
What is the carrying value of the trademark after the sale?

Question

Quizplus · Accepted Answer

The carrying value of the trademark would not change due to the sale of shares. Under the equity method, the investment is accounted for at cost and then adjusted for the investor's share of the investee's profits or losses and dividends. The sale of some shares does not affect the valuation of the trademark on the books of the investor or the investee. The trademark's fair value at acquisition was $20,000, and this value does not change due to the sale of shares.

ABC Inc Purchased 35,000 Voting Shares Out of 123 Inc