Question

On April 1, 2021, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick's identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2021, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2021, and paid total dividends for the year of $10,000; these dividends were issued quarterly. BigBen's investment in LittleTick will affect BigBen's 2021 net income by:________

Answer 1

$10,500 loss

Step-by-step explanation:

The computation of the net income affected is shown below:

Since Big Ben purchased shares of Little Trick on 1st April ,so it has the right to receive 30% of the net income for nine months i.e from April 1 to December 31

Now the Earnings from Little Trick is

= $20,000 × 30% × 9 months ÷ 12 months

= $4,500

And, the Compensation paid is $15,000

So, the loss is

= $15,000 - $4,500

= $10,500