Equity Method Rollforward: Dividends and Basis Differences

Question 1

On January 1, Year 1, Able Co. acquired 25% of Baker Co.'s common stock for $650,000 and has significant influence. Baker's book value at that date was $2,400,000. The entire excess of Able's purchase price over its share of Baker's book value is attributable to depreciable equipment with a remaining useful life of 10 years and no residual value. During Year 1, Baker reported net income of $200,000 and paid cash dividends of $60,000. Assume no impairment and no other basis differences. What amount of equity-method income should Able recognize for Year 1, and what is the December 31, Year 1 carrying amount of the investment?

Accepted Answer

Year 1 income includes $45,000 of equity-method income, and the investment is reported at $680,000.

Question 2

On 1/2/20X5, Pella Co. purchased 30% of Sona Co.'s voting common stock for $1,140,000 and determined it has significant influence. On the acquisition date, Sona's book value of net assets was $3,000,000. The fair value of Sona's identifiable net assets exceeded book value by $300,000 for equipment (10-year remaining life) and by $150,000 for a customer-related intangible (5-year remaining life). Any remaining excess of Pella's purchase price over its share of the fair value of Sona's net assets is goodwill. Assume Pella owned the investment from the acquisition date (1/2/20X5) through 12/31/20X5 and that Sona's reported net income of $360,000 and dividends of $120,000 apply to that ownership period. Assume no impairment indicators, no fair value option election, and ignore income taxes. What is the most supportable amount Pella should report for its Investment in Sona at 12/31/20X5?

Accepted Answer

$1,194,000

Question 3

On January 1, Year 1, Alder Corp purchased 30% of Birch Co.'s outstanding voting stock for $450,000 and obtained significant influence. Alder does not control Birch, did not elect the fair value option, and properly applies the equity method throughout Year 1. At acquisition, Birch's book value of net identifiable assets was $1,200,000. The only differences between the book values and fair values of Birch's identifiable net assets were: (1) equipment fair value exceeded book value by $180,000, with a remaining useful life of 6 years and straight-line depreciation, and (2) land fair value exceeded book value by $60,000. Any remaining excess of cost over Alder's share of the fair value of Birch's net identifiable assets is goodwill. During Year 1, Birch reported net income of $240,000, declared and paid cash dividends of $60,000, and reported other comprehensive loss of $30,000. Assume there were no intra-entity transactions, no impairment indicators, and no other basis differences. What amount should Alder report as its investment in Birch at December 31, Year 1?

Accepted Answer

$486,000

Question 4

On January 2, X5, Alder Corp. acquired 18% of Birch Co.'s voting common stock for $1,260,000. Alder obtained a board seat and participates in Birch's policy‑making processes; these facts indicate significant influence, so the equity method applies (Alder did not elect the fair value option). Treat Alder as holding the investment essentially for the full year X5 (apply Alder's full‑year share of Birch's X5 reported net income and dividends). At acquisition, Alder's share of Birch's book value of net assets was $1,080,000. The $180,000 excess of cost over Alder's share of book value was attributable to equipment of $120,000 with an 8‑year remaining life, a customer relationship of $30,000 with a 10‑year remaining life, and goodwill of $30,000. During X5, Birch reported net income of $500,000 and declared cash dividends of $100,000. Birch's reported income already reflects its own depreciation and amortization. The fair value of Alder's investment at 12/31/X5 was $1,350,000. Assume no impairment indicators and no intra‑entity transactions. What amount should Alder report on its 12/31/X5 balance sheet as Investment in Birch?

Accepted Answer

$1,314,000

Question 5

On January 2, Year 1, Alder Co. purchased 18% of Birch Corp.'s outstanding voting common stock for $1,200,000. Birch's shares are actively traded, and Alder did not elect the fair-value option. Although Alder owns less than 20%, a shareholder agreement gives Alder the right to appoint 1 of Birch's 7 directors, and Alder routinely participates in Birch's operating and financing policy decisions. Assume no basis differences between Alder's purchase price and its share of Birch's net assets, and no impairment indicators. During Year 1, Birch reported net income of $300,000 and paid cash dividends that resulted in Alder receiving $36,000. The fair value of Alder's investment at December 31, Year 1, was $1,310,000. What amount should Alder report for this investment on its December 31, Year 1 balance sheet?

Accepted Answer

$1,218,000

Question 6

On January 2, Year 1, Harlan Corp. purchased 18% of the voting common stock of Mace Co. for $900,000. Harlan obtained one seat on Mace's five-member board and participates in Mace's operating and financing policy decisions, but Harlan does not control Mace. During Year 1, Mace reported net income of $200,000 and paid cash dividends of $60,000. Mace's shares are publicly traded and had a fair value of $980,000 at December 31, Year 1. Assume Harlan did not elect the fair value option, no basis differences require amortization, and there are no impairment indicators. What is the best action for Harlan at December 31, Year 1?

Accepted Answer

Apply the equity method and report the investment at $925,200.

Question 7

On January 1, Year 1, Pine Co. purchased 25% of Sage Corp.'s common stock for $500,000 and can exercise significant influence over Sage. Pine therefore uses the equity method. On that date, Sage's book value was $1,600,000. Pine determined that the entire excess of cost over its share of Sage's book value was attributable to undervalued assets as follows: land $40,000 and equipment $60,000. The equipment has a remaining useful life of 5 years and is depreciated on a straight-line basis. During Year 1, Sage reported net income of $240,000 and paid cash dividends of $80,000. Assume no impairment indicators existed. What amount should Pine report as its investment in Sage at December 31, Year 1?

Accepted Answer

$528,000

Question 8

On January 2, 20X5, Pine Co. purchased 25% of Sage Corp.'s outstanding common stock for $600,000. Pine obtained the ability to exercise significant influence over Sage and appropriately applies the equity method. On the acquisition date, Pine's cost exceeded its share of Sage's book value by $80,000; $50,000 of that difference was attributable to a building with a 10-year remaining life, and the remainder was attributable to goodwill. During 20X5, all of Sage's earnings and dividends occurred after the acquisition. Sage reported net income of $160,000 and declared and paid cash dividends of $60,000. No impairment indicators existed during 20X5. What amount should Pine report as its investment in Sage on December 31, 20X5?

Accepted Answer

$620,000

Question 9

On 4/1/20X5, Norwood Co. purchased 25% of Sable Inc.'s outstanding common stock for $620,000 and obtained significant influence. Sable's book value of net assets on 4/1/20X5 was $2,200,000. On that date, the fair value of Sable's identifiable net assets exceeded book value by $160,000 for equipment with a remaining useful life of 5 years and by $80,000 for land. Any remaining excess of cost over Norwood's share of the fair value of net assets is goodwill. Sable reported net income of $480,000 for 20X5, earned evenly throughout the year, and paid cash dividends of $100,000 on 12/1/20X5. Assume no impairment, no intercompany transactions, no investee OCI items, and no other basis differences. Under the equity method, what is the most supportable amount Norwood should report for its investment in Sable at 12/31/20X5?

Accepted Answer

$679,000

Question 10

On April 1, Year 1, Alder Co. acquired 30% of Birch Co.'s voting common stock for $1,020,000 and obtained significant influence. Birch's book value of net assets on that date was $3,000,000. At acquisition, the only identifiable fair-value adjustments were: inventory's fair value exceeded its carrying amount by $120,000 (all of that inventory was sold to outside customers before December 31), and equipment's fair value exceeded its carrying amount by $240,000 (4-year remaining life, straight-line). Any remaining excess purchase price was assigned to goodwill. For the period April 1 through December 31, Year 1, Birch reported net income of $450,000, which includes the November intercompany sale described below, and paid cash dividends of $100,000 on December 1. In November Year 1, Birch sold inventory to Alder at a profit of $50,000; half of that inventory remained on Alder's books at December 31. Alder applies the equity method from April 1; no impairment is recognized. Intercompany profit eliminations are required under the equity method. What amount should Alder report as Investment in Birch at December 31, Year 1?

Accepted Answer

$1,068,000

1	Share of investee net income20% × $350,000	$70,000
2	Equipment basis amortization$70,000 ÷ 7 years	$10,000
3	Equity-method income$70,000 - $10,000	$60,000
4	Dividends received20% × $150,000	$30,000
5	Ending investment balance$800,000 + $60,000 - $30,000	$830,000

Equity Method Rollforward: Dividends and Basis Differences

Key points

How the exam traps you

5 more, each from a different angle

Common questions

Practice FAR like the real exam

More on Investments