Rin owns 90% of Stempy Inc. On January 1, 2019, the investment in Stempy account had a balance of $350,000 and Stempy's common shares and retained earnings on that date were valued at $200,000 and $100,889 respectively. Moreover, the assets to which the unamortized acquisition differential relates had a remaining life of 10 years on that date. Rin uses the equity method to account for its investment in Stempy. The tax rate for both companies is zero.
Rin sold depreciable assets to Stempy on January 1, 2019 at an after-tax gain of $10,000. On January 1, 2020, Stempy sold depreciable assets to Rin at an after-tax gain of $20,000. Both assets are being depreciated over 10 years.
The tax rate for both companies is zero.
Stempy's Net Income and Dividends for 2019 and 2020 are shown below.
$$\begin{array} { | l | r | r| }
\hline & \mathbf { 2 0 1 9 } & \mathbf { 2 0 2 0 } \
\hline \text { Net Incorne } & \mathbf { \$ 8 0 , 0 0 0 } & \mathbf { \$ 1 2 0 , 0 0 0 } \
\hline \text { Dividends } & \mathbf { \$ 2 0 , 0 0 0 } & \mathbf { \$ 3 0 } , \mathbf { 0 0 0 } \
\hline
\end{array}$$ What is the balance in the Investment in Stempy account at the end of 2020?

Question

Rin owns 90% of Stempy Inc. On January 1, 2019, the investment in Stempy account had a balance of $350,000 and Stempy's common shares and retained earnings on that date were valued at $200,000 and $100,889 respectively. Moreover, the assets to which the unamortized acquisition differential relates had a remaining life of 10 years on that date. Rin uses the equity method to account for its investment in Stempy. The tax rate for both companies is zero.
Rin sold depreciable assets to Stempy on January 1, 2019 at an after-tax gain of $10,000. On January 1, 2020, Stempy sold depreciable assets to Rin at an after-tax gain of $20,000. Both assets are being depreciated over 10 years.
The tax rate for both companies is zero.
Stempy's Net Income and Dividends for 2019 and 2020 are shown below.
$$\begin{array} { | l | r | r| } 
\hline & \mathbf { 2 0 1 9 } & \mathbf { 2 0 2 0 } \
\hline \text { Net Incorne } & \mathbf { \$ 8 0 , 0 0 0 } & \mathbf { \$ 1 2 0 , 0 0 0 } \
\hline \text { Dividends } & \mathbf { \$ 2 0 , 0 0 0 } & \mathbf { \$ 3 0 } , \mathbf { 0 0 0 } \
\hline
\end{array}$$ What is the balance in the Investment in Stempy account at the end of 2020?

Quizplus · Accepted Answer

The balance in the Investment in Stempy account at the end of 2020 can be calculated as follows:1. Initial investment balance on January 1, 2019: $350,0002. Add: Rin's share of Stempy's net income for 2019 (90% of $80,000): $72,0003. Less: Rin's share of Stempy's dividends for 2019 (90% of $20,000): -$18,0004. Add: Rin's share of Stempy's net income for 2020 (90% of $120,000): $108,0005. Less: Rin's share of Stempy's dividends for 2020 (90% of $30,000): -$27,0006. Less: Amortization of acquisition differential for 2019 and 2020 (2 years of the 10-year life, the differential is not directly given but can be inferred from the excess of investment over equity at acquisition, which includes goodwill and any fair value adjustments. However, without specific differential amounts, we only adjust for the intercompany profits that need to be eliminated):   - Elimination of the after-tax gain on the sale of depreciable assets to Stempy in 2019: -$10,000 (since Rin owns 90% of Stempy, but this gain should not affect the consolidated figures)   - Additional depreciation for the asset sold to Stempy in 2019: $1,000 per year for 2 years: -$2,000   - Elimination of the after-tax gain on the sale of depreciable assets to Rin in 2020: -$20,000 (similar reasoning as above)   - Additional depreciation for the asset sold to Rin in 2020: $2,000 per year for 1 year: -$2,000Adding these adjustments to the initial investment balance:$350,000 + $72,000 - $18,000 + $108,000 - $27,000 - $10,000 - $2,000 - $20,000 - $2,000 = $444,960Therefore, the correct balance in the Investment in Stempy account at the end of 2020 is $444,960.

Rin Owns 90% of Stempy Inc What Is the Balance in the Investment in Stempy Account