On January 1, 2013, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2013, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2013?

Question

Quizplus · Accepted Answer

The carrying value of an investment in a company is equal to the initial cost of the investment (in this case, $300,000) plus the investor's share of the investee's net income (in this case, 20% of $125,000 equals $25,000) minus the investor's share of any dividends paid (in this case, 20% of $25,000 equals $5,000). 
Therefore, carrying value = $300,000 + $25,000 - $5,000 = $320,000
However, since the intangible asset was undervalued, the excess of cost over book value of $25,000 will be amortized over the remaining useful life of 5 years, resulting in an annual amortization expense of $5,000. 
So, the carrying value of the investment is reduced by $5,000 to account for the amortization expense, resulting in a final carrying value of $315,000. 
Thus, the correct answer choice is C.

On January 1, 2013, Green Corporation Purchased 20% of the Outstanding