Question

During January 2007, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2007, Wilton reported net income of $600,000. For 2008, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2008

Answer 1

$1,609,000

Step-by-step explanation:

Book value of the investment:

= (Reported Assets - Reported Liabilities) × Acquired 30% of outstanding common stock

= $(6,400,000 - 3,000,000) × 30%

= $1,020,000

Excess of cost over book value:

= Acquired common stock - Book value of the investment

= $1,400,000 - $ 1,020,000

= $ 380,000

Increase in the value of investment at the end of 2007:

= (Net income × 30 %) - (Excess of cost over book value ÷ 10) - (Dividends × 30%)

= ($600,000 × 30 %) - ($380,000 ÷ 10) - ($200,000 × 30%)

= $82,000

Increase in the value of the investment during 2008:

= (Reported net income × 30%) - (Excess of cost over book value ÷ 10) - (Dividends × 30%)

= ($750,000 × 30%) - $38,000 - ($200,000 × 30%)

= $127,000

Reported balance of the investment of Wells Inc. in Wilton Co. :

= Acquired common stock + Increase in the value of investment at the end of 2007 + Increase in the value of the investment during 2008

= $1,400,000 + $82,000 + $127,000

= $1,609,000