Question

On January 1, 2020, Blue Co. purchased 24,000 shares (a 10% interest) in Elton John Corp. for $1,300,000. At the time, the book value and the fair value of John’s net assets were $14,100,000.

On July 1, 2021, Blue paid $2,920,000 for 48,000 additional shares of John common stock, which represented a 20% investment in John. As a result of this transaction, Blue owns 30% of John and can exercise significant influence over John’s operating and financial policies. (Any excess fair value is attributed to goodwill.)

John reported the following net income and declared and paid the following dividends.

Net Income

Dividend per Share

Year ended 12/31/20

$690,000 None
Six months ended 6/30/21

480,000 None
Six months ended 12/31/21

800,000 $1.55

Determine the ending balance that Blue Co. should report as its investment in John Corp. at the end of 2021.

Investment in Elton John Corp. $Enter the investment in Elton John Corp. in dollars

Answer 1

Blue Co. should report an ending balance of $6,540,000 for its investment in John Corp at the end of 2021.

Step-by-step explanation:

Blue Co. should report an ending balance of $6,540,000 for its investment in John Corp at the end of 2021.

To calculate the ending balance, we need to consider the initial purchase of 24,000 shares and the subsequent purchase of 48,000 additional shares. The investment in John Corp can be calculated as follows:

Initial investment:

24,000 shares x $14,100,000 (book value) / 100% = $3,384,000

Second investment:

48,000 shares x ($2,920,000 - $1,300,000) / ($14,100,000 x 70%) = $3,156,000

The total investment in John Corp is $3,384,000 + $3,156,000 = $6,540,000.