Question

On January 1, 20X2, Pint Corporation acquired 80 percent of Size Corporation for $200,000 cash. Size reported net income of $25,000 each year and dividends of $5,000 each year for 20X2, 20X3, and 20X4. On January 1, 20X2, Size reported common stock outstanding of $160,000 and retained earnings of $40,000, and the fair value of the noncontrolling interest was $50,000. It held land with a book value of $90,000 and a market value of $100,000, and equipment with a book value of $40,000 and a market value of $48,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of eight years. All depreciable assets held by Size at the date of acquisition had a remaining economic life of eight years. Pint uses the equity method in accounting for its investment in Size.

Based on the preceding information, what balance would Pint report as its investment in Size at January 1, 20X5?
A) $236,000
B) $248,000
C) $260,000
D) $300,000

Answer 1

To determine Pint Corporation's investment in Size at January 1, 20X5, we must calculate the initial investment, add Pint's share of Size's net income, subtract dividends received and the share of amortization of fair value adjustments over the years.

Step-by-step explanation:

To calculate the balance Pint Corporation would report as its investment in Size at January 1, 20X5, we consider the initial investment and the equity method of accounting.

Pint Corporation's initial investment in Size on January 1, 20X2 was $200,000. Size Corporation reported net income of $25,000 each year and paid dividends of $5,000 each year. Over three years (20X2, 20X3, and 20X4), the total net income attributable to Pint is 80% of $25,000 times three years, which equals $60,000. The total dividends received are 80% of $5,000 times three years, which equals $12,000.

Since Pint owns 80%, it must also account for 80% of the excess of fair value over book value assigned to identifiable assets. The land adjustment is $10,000 (100,000 - 90,000) and the equipment adjustment is $8,000 (48,000 - 40,000). These must be depreciated/amortized over their useful life of eight years. The patent differential also needs to be amortized over eight years.

Therefore, the annual amortization for the land and equipment is $2,250 (80% of $2,800) and for the patents, it's the remaining differential divided by eight. If the fair value of the noncontrolling interest at acquisition was $50,000, the total fair value of Size would have been $250,000 (200,000 investment + 50,000 NCI). Since the equity accounts totaled $200,000 (160,000 common stock + 40,000 retained earnings), the total differential is 50,000. After subtracting land and equipment adjustments, the patent differential is $32,000. The annual patent amortization is $4,000 (32,000 / 8).

Thus, Pint's share of the amortizations is $2,250+ $4,000 = $6,250 per year. After three years, this results in a total reduction of $18,750 (6,250 x 3) from the initial investment.

The investment balance on January 1, 20X5 would then be calculated as follows:
Initial investment + (Investment earnings - Dividends received - Accumulated amortization expense) = $200,000 + ($60,000 - $12,000 - $18,750) = $229,250.

However, none of the above answer choices match this calculation. Therefore, it might be wise to review the assumptions and calculations again and, if necessary, seek clarification of the correct figures.