On January 1, 2013, an investor purchases 28,000 common shares of an investee at $12 (cash) per share. The shares represent 20% ownership in the investee. The investee's common stock does not have a readily determinable fair value. On January 1, 2013, the book value of the investee's assets and liabilities equals $900,000 and $200,000, respectively. On that date, the appraised fair values of the investee's identifiable net assets approximated the recorded book values, except for a customer list. On January 1, 2013, the customer list had a recorded book value of $0, an estimated fair value equal to $50,000 and a 5 year remaining useful life. During the year ended December 31, 2013, the investee company reported net income equal to $42,000 and dividends equal to $20,000.
Noncontrolling investment accounting (price different from book value)
Assume the investor does not exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2013.
$336,000
$288,800
$280,000
$340,800
I chose 336,000 and would like to know if I am right
To determine the balance in the "Investment in Investee" account at December 31, 2013, we need to consider the initial investment, the share of net income, and the share of dividends.
1. Initial Investment:
The investor purchased 28,000 common shares at $12 per share. Therefore, the initial investment can be calculated as:
Initial Investment = Number of Shares x Purchase Price per Share
Initial Investment = 28,000 shares x $12 per share
Initial Investment = $336,000
2. Share of Net Income:
The investor owns 20% of the investee, so we need to calculate the share of net income for the investor. The investee reported net income of $42,000. Therefore, the share of net income can be calculated as:
Share of Net Income = Net Income x Ownership Percentage
Share of Net Income = $42,000 x 20%
Share of Net Income = $8,400
3. Share of Dividends:
The investor also receives a share of dividends from the investee. The investee reported dividends of $20,000. Therefore, the share of dividends can be calculated as:
Share of Dividends = Dividends x Ownership Percentage
Share of Dividends = $20,000 x 20%
Share of Dividends = $4,000
Now, we can determine the balance in the "Investment in Investee" account at December 31, 2013, by considering the initial investment, share of net income, and share of dividends:
Balance in "Investment in Investee" account = Initial Investment + Share of Net Income - Share of Dividends
Balance in "Investment in Investee" account = $336,000 + $8,400 - $4,000
Balance in "Investment in Investee" account = $340,400
Therefore, the correct answer is $340,400.
To determine the balance in the "Investment in Investee" account at December 31, 2013, we need to calculate the equity income and the dividends received from the investee.
1. Calculate the equity income:
Equity income = Investor's ownership percentage * Investee's net income
Equity income = 20% * $42,000
Equity income = $8,400
2. Calculate the dividends received:
Dividends received = Investor's ownership percentage * Dividends paid by investee
Dividends received = 20% * $20,000
Dividends received = $4,000
3. Calculate the change in the investment balance:
Change in the investment balance = Equity income - Dividends received
Change in the investment balance = $8,400 - $4,000
Change in the investment balance = $4,400
4. Calculate the new investment balance at December 31, 2013:
New investment balance = Initial investment + Change in the investment balance
New investment balance = $336,000 + $4,400
New investment balance = $340,400
Therefore, the correct answer is $340,800.