On January 1, 2010, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco.
-The equity in income of Sacco for 2010, is

Question

Quizplus · Accepted Answer

The equity in income of Sacco for 2010 is $13,500. This is calculated as follows:Net income of Sacco for 2010 = $50,000Dawson's ownership interest = 30%Equity in income of Sacco for 2010 = $50,000 x 30% = $15,000Less: Amortization of excess of fair value over book value of patent = $1,500Equity in income of Sacco for 2010 = $15,000 - $1,500 = $13,500

On January 1, 2010, Dawson, Incorporated, Paid $100,000 for a 30