Question 15.5: On 1 January 2009, Wicker Company acquired a 25 percent inte...
On 1 January 2009, Wicker Company acquired a 25 percent interest in Foxworth Company (both companies are fictitious) for $1 million and used the equity method to account for its investment. The book value of Foxworth’s net assets on that date was $3,800,000. An analysis of fair values revealed that all assets and liabilities were equal to book values except for a building. The building was undervalued by $40,000 and has a 20-year remaining life. The company used straight-line depreciation for the building. Foxworth paid $3,200 in dividends in 2009. During 2009, Foxworth reported net income of $20,000. During the year, Foxworth sold inventory to Wicker.
At the end of the year, goods remained in Wicker’s inventory that Foxworth had recognized $8,000 of profit on.
1. Calculate the equity income to be reported as a line item on Wicker’s 2009 income statement.
2. Calculate the balance in the investment in Foxworth to be reported on the 31 December 2009 balance sheet.
| Purchase price | $1,000,000 |
| Acquired equity in book value of Foxworth’s net assets (25% × $3,800,000) | \underline{950,000} |
| Excess purchase price | \underline{\underline{\$50,000} } |
| Attributable to: | |
| Building (25% × $40,000) | $10,000 |
| Goodwill (residual) | \underline{\$40,000} |
| \underline{\underline{\$50,000} } |
1: Equity Income
(table 1)
2: Investment in Foxworth
(table 2)
| table 1 | |
| Wicker’s share of Foxworth’s reported Income (25% × $20,000) | $5,000 |
| Amortization of excess purchase price attributable to building ($10,000/20) | (500) |
| Unrealized profit (25% × $8,000) | (2,000) |
| Equity income 2009 | \underline{\underline{\$2,500} } |
| table 1 | |
| Purchase price | $1,000,000 |
| Equity income 2009 | 2,500 |
| Dividends received (25% × $3,200) | \underline{(800)} |
| Investment in Foxworth, 31 Dec 2009 | \underline{\underline{\$1,001,700 } } |
| Composition of investment account: | |
| Wicker’s monetary equity in Foxworth’s recorded net assets [25% × ($3,800,000 + (20,000 – 8,000) – 3,200)] | $952,200 |
| Unamortized excess purchase price ($50,000 – 500) | \underline{49,500} |
| $1,001,700 | |