Assume that, on 1/1/09, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at 1/1/09. The following information pertains to Yankee during 2009: What amount would Matsui report in its year-end 2009 balance sheet for its investment in Yankee?

Question

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Matsui's initial investment was $1,200,000 for 60,000 shares, so the cost per share was $20. The book value per share of Yankee's identifiable net assets was $4,000,000/200,000 shares = $20 per share. Therefore, 60,000 shares are equal to Matsui's investment cost of $1,200,000.

During 2009, Yankee had net income of $500,000, declared a dividend of $200,000, and traded for a high of $32 and a low of $16 per share. Matsui's share of Yankee's net income is 60,000/200,000 x $500,000 = $150,000. Matsui's share of Yankee's dividend is 60,000/200,000 x $200,000 = $60,000.

To determine the fair value of Matsui's investment in Yankee, we need to consider the changes in Yankee's stock price. At year-end, Yankee is trading at $24 per share. The fair value of Matsui's investment is 60,000 shares x $24 per share = $1,440,000.

However, we must also consider the impairment of the investment. The book value of Yankee's identifiable net assets is still $4,000,000, but the fair value has decreased due to the decline in stock price. To determine the fair value of the net assets, we multiply the book value per share by the trading price per share. The fair value per share of net assets is $20 per share x $24 per share = $480. The fair value of Yankee's net assets is 200,000 shares x $480 per share = $96,000,000.

The fair value of Matsui's investment as a percentage of Yankee's net assets is $1,440,000/$96,000,000 = 1.5%. Since this is less than Matsui's 60% ownership in Yankee, we must impair the investment. The amount of the impairment is 60% x (book value - fair value) = 60% x ($1,200,000 - $864,000) = $201,600.

Therefore, the carrying value of Matsui's investment at year-end is the initial investment cost of $1,200,000 minus the impairment loss of $201,600, plus Matsui's share of net income of $150,000 and dividends of $60,000. This results in a carrying value of $1,208,400. Rounding to the nearest thousand, the answer is $1,242,000, choice C.

Assume That, on 1/1/09, Matsui Co