Question

Kaye Company acquired 100% of Fiore Company on January 1, 2011. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2011 and paid dividends of $100.

Assume the partial equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

Answer 1

Kaye's overall income increase or decrease as a result of Fiore's operations would be $300.

Step-by-step explanation:

To calculate the increase or decrease in Kaye's income as a result of Fiore's operations, we need to consider the partial equity method. Under this method, Kaye's income will increase by its share of Fiore's net income and decrease by its proportionate share of Fiore's dividends.

In this case, Kaye acquired 100% of Fiore, so it would be entitled to 100% of Fiore's net income and would also bear 100% of Fiore's dividends. Fiore's net income is $400, so Kaye's income would increase by $400. Fiore's dividends are $100, so Kaye's income would decrease by $100.

Therefore, Kaye's overall income increase or decrease as a result of Fiore's operations would be $400 - $100 = $300.