Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000.
-How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011?

Question

Quizplus · Accepted Answer

The adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011, is a debit of $16,500. This is calculated as follows:Purchase price of additional 30% = $325,000Book value of 30% on January 1, 2011 = 30% x $1,000,000 = $300,000Excess of cost over book value = $325,000 - $300,000 = $25,000Adjustment to Investment in Stanley Corporation = 10% x $25,000 = $2,500Adjustment for net income earned in 2010 = 10% x $215,000 = $21,500Total adjustment = $2,500 + $21,500 = $24,000Less: Dividends received in 2010 = 10% x $50,000 = $5,000Adjustment to Investment in Stanley Corporation = $24,000 - $5,000 = $19,000Less: Adjustment for net income earned in 2011 = 40% x $320,000 = $128,000Adjustment to Investment in Stanley Corporation = $19,000 - $128,000 = $16,500