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} } |
