On January 4, 2010, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values.
During 2010, Bike reported net income of $500,000. For 2011, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years.
-What was the reported balance of Harley's Investment in Bike Co. at December 31, 2010?

Question

Quizplus · Accepted Answer

Harley's initial investment in Bike was $2,400,000 for 40% of Bike's outstanding common stock, thus implying that Bike's total value was $6,000,000 ($2,400,000/0.4). Since Bike's total recorded assets were $10,500,000, Harley's share of Bike's net assets would have been $4,200,000 ($6,000,000*0.7) on January 4, 2010.
Harley would then share in Bike's net income of $500,000 for 2010, based on Harley's 40% ownership interest ($200,000). The dividends paid to Harley would have been $120,000 ($300,000*0.4).
Harley's Investment in Bike Co. balance at December 31, 2010, would have been as follows:
Initial investment: $2,400,000
Share of Bike's net income: $200,000
Share of Bike's dividends: ($120,000)
Balance as of December 31, 2010: $2,480,000