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 initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

Answer 1

Kaye's income will increase by $480 as a result of Fiore's operations.

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 excess consideration paid by Kaye and the amortization of that excess consideration.

In this case, Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. Since the excess consideration is being amortized over a period of time, the income increase or decrease will depend on the number of years.

Since Fiore's net income in 2011 was $400 and it paid dividends of $100, the increase or decrease in Kaye's income would be:

• Net income from Fiore: $400
• Excess consideration amortization: -$20
• Dividends received from Fiore: +$100

Therefore, Kaye's income would increase by $480 as a result of Fiore's operations.