Question

Evan Company reports net income of $140,000 each year and declares an annual cash dividend of $50,000. The company holds net assets of $1,200,000 on January 1, 2014. On that date, Shalina purchases 40 percent of the outstanding stock for $600,000, which gives it the ability to significantly influence Evan. At the purchase date, the excess of Shalina's cost over its proportionate share of Evan's book value was assigned to goodwill. On December 31, 2016, what is the Investment in Evan Company balance (equity method) in Shalina's financial records?$708,000.$600,000.$690,000.$660,000.

Answer 1

Carrying value at end of year 2016 = $708,000

Step-by-step explanation:

Provided information,

We have

Cost of acquisition = $600,000

Less: Book value of assets = $1,200,000
`*` 40% = ($480,000)

Goodwill = $120,000

Life of goodwill = infinite

Thus, amortization = 0

In case of equity method, all the share of dividend is deducted from cost of acquisition and share of profit or net income is added to carrying value.

Cost in books as on Jan 1, 2014 = $600,000

Add: Share in income for 2014 = $140,000
`*` 40% = $56,000

Less: Dividend in 2014 = $50,000
`*` 40% = ($20,000)

Add: Share in income in 2015 = $56,000

Less; Share of dividend in 2015 = ($20,000)

Add: Share of income in 2016 = $56,000

Less: Share of dividend in 2016 = ($20,000)

Carrying value at end of year 2016 = $708,000