Question

Perimeter, Inc. acquired 30 percent of South Co.’s (South) voting stock for $200,000 on January 1, 20X1. Perimeter’s 30 percent interest in South gave Perimeter the ability to exercise significant influence over South’s operating and financial policies. On that date, South reported assets of $500,000 and liabilities of $100,000. South had equipment with a book value of $60,000 that was actually worth $160,000. The equipment had a remaining useful life of five years. During 20X1, South reported net income of $80,000 and paid dividends of $50,000. What amount of income should Perimeter recognize in 20X1 as a result of this investment?

Answer 1

$18,000

Step-by-step explanation:

Required:

Find the amount of income Perimeter recognizes in 20X1 as a result of the investment.

Amount of income to be recognized should be calculated as:

Share of net income - Amortization of equipment in excess of book value

Where,

Share of net income = 30% of net income

= 30% × $80,000

= $24,000

Less: Amortization of equipment in excess of book value =

`(160,000 - 60,000)/(5 yrs) * 0.30`

`= (100,000)/(5) * 0.30`

`= 6,000`

Therefore, amount of income to be recognized =

$24,000 - $6,000

= $18,000

Amount of income Perimeter recognizes in 20X1 as a result of this investment is $18,000