Question

Emily Corporation purchased all of Ace Company's common stock on January 1, 2020, for $1,000,000 cash. The investee's stockholders' equity amounted to $400,000. The excess of $600,000 was due to an unrecorded patent with a six-year life. In 2020, Ace reported net income of $250,000 and paid dividends of $25,000. What is the Equity Investment balance at December 31, 2020?

Answer 1

$1,125,000

Step-by-step explanation:

The calculation of the Equity Investment balance is shown below:-

Net equity income = Income - Dividends

= $250,000 - $25,000

= $225,000

Amortization of unrecorded patents = $600,000 ÷ 6

= $100,000

Balance of investment = Initial investment + Net equity income - Amortization of unrecorded patents

= $1,000,000 + $225,000 - $100,000

= $1,125,000