Question

In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years.

In 2017, Martes reported net income of $170,000. In 2018, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years. What is the equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2018?
a. $728,000
b. $748,000
c. $756,000
d. $776,000

Answer 1

Answer: $728000

Step-by-step explanation:

The equity method balance of Doingo’s Investment in Martes, Inc. at December 31, 2018 will be:

Acquisition price = $700,000

Add: Income accruals in 2017 = $34000

Add: Income accruals in 2018 = $42000

Less: Ammortization in 2017 = $10000

Less: Ammortization in 2018 = $10000

Less: Dividends in 2017 = $14000

Less: Dividends in 2018 = $14000

Domingo Investment in Martes = $728000

Note:

Income accrual (2017) = $170000 × 20% = $34000

Income accrual (2018) = $210000 × 20% = $42000

Dividends = 20% × $70000 = $14000