Question

In January 2014, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence over Martes. Martes's assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years.In 2014, Martes reported net income of $170,000. In 2015, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years. What is the equity method balance of Domingo's Investment in Martes, Inc., at December 31, 2015?$728,000.$756,000.$748,000.$776,000.

Answer 1

$728,000

Step-by-step explanation:

Domingo, Inc acquire for 700,000 the 20% of Martes's Equity

book value:

3,900,000 assets - 900,000 liab = 3,000,000

20% = 600,000

The difference will be attribute to a patent which useful life is 10 years.

700,000 - 600,000 = 100,000

amortization: 100,000/10 = 10,000 per year

Martes Net income 170,000 x 20% = 42,000

Martes Net income 210,000 x 20% = 42,000

Martes dividends 70,000 x 20% = 14,000

Martes dividends 70,000 x 20% = 14,000

beginning balance 700,000

net income 34,000

net income 42,000

dividends (28,000)

amortization on patent (20,000)

net 728,000