Question

"Topic: Equity method investments:

Eton Corporation acquires 30% of the voting stock of Fairfield Company for $60,000,000 on January 1, 2014, and classifies the investment as an equity method investment. At the time, the book value of the company was $200,000,000. Eton determined that the book value of Fairfield's plant assets (15 year life, straight-line) were overstated by $10,000,000 and Fairfield had unreported intangible assets (5 year life, straight-line) with a fair value of $8,000,000. During 2014 Fairfield reported net income of $2,400,000 and declared and paid dividends of $1,000,000. Both companies have December 31 year-ends. At what amount will Eton report its investment in Fairfield on its December 31, 2014 balance sheet?"

Answer 1

Eton Corporation will report its investment in Fairfield on its December 31, 2014, balance sheet as $59,740,000 after considering initial investment, fair value adjustments, Eton's share of net income, additional depreciation, amortization of intangible assets, and dividends received.

Step-by-step explanation:

To calculate how much Eton Corporation will report its investment in Fairfield on its December 31, 2014, balance sheet, we need to consider the initial investment, adjustments for fair value, and the equity method of accounting for investments. Eton owns 30% of Fairfield's voting stock, which it acquired for $60,000,000. First, we adjust for the overstatement in Fairfield's plant assets and unrecognized intangible assets. The plant assets, overstated by $10,000,000 with a 15-year life, imply an annual depreciation of $666,667 ($10,000,000 / 15). Since Eton owns 30%, it will recognize $200,000 ($666,667 * 30%) as additional depreciation each year. The unreported intangible assets, valued at $8,000,000 with a 5-year life, result in $1,600,000 ($8,000,000 / 5) of annual amortization. Eton's share is $480,000 ($1,600,000 * 30%). Next, we incorporate the effects of Fairfield's net income and dividends into Eton's investment account. 30% of the net income of $2,400,000 is $720,000, which is added to Eton's investment. However, the dividends declared and paid by Fairfield of $1,000,000 result in a cash outflow for Eton of $300,000 (30% of $1,000,000).

Thus, the equity calculation for Eton's investment in Fairfield on December 31, 2014, is as follows:

• Initial investment: $60,000,000
• Plus: Eton's share of net income (30% of $2,400,000): +$720,000
• Less: Eton's share of additional depreciation: -$200,000
• Less: Eton's share of intangible asset amortization: -$480,000
• Less: Eton's share of dividends received (30% of $1,000,000): -$300,000

Adding these up, the investment value reported by Eton Corporation in Fairfield Company on December 31, 2014, would be $59,740,000.