Question

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at December 31, 2013?

Answer 1

$447,500

Step-by-step explanation:

1. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook

Therefore Balance on investment account as at 31 December, 2012. - $150,000

2. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000.

Therefore:

Book value of 25% of $1,150,000 = 287,500

Excess of cost over book value = 300,000 - 287,500 = 12,500

Yearly amortization of excess = 12500/5 = 2500

Therefore balance in investment account at the end of 2013 will be:

150,000+300,000 - 2500 = $447,500