Question

On January 1, 2013, an investor purchases 16,000 common shares of an investee at $12 (cash) per share. The shares represent 20% ownership in the investee. The investee shares are not considered "marketable" because they do not trade on an active exchange. 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 can exert significant influence over the investee. Determine the balance in the "Investment in Investee" account at December 31, 2013.

$194,400

$190,000

$172,400

$168,000

Answer 1

a) $194400

Account balance of the Investment in investee on December 31 2013.caluculated as

opening balance + share of profit - share of divident received.

opening balance = invested amount = $192000 (16000*12)

share of profit = net income - depreciation for the year * 20%

(as net asset of the investee companyundervalued by 50000. the excess depreciation on the asset should be accounted on the calculation of net profit.)

excess depreciation for the year = 50000/5 =10000

share of profit = (42000-10000)*20% = 6400

share of divident = $4000 (20000*20%)

Closing balance of the invetment ininvestee =

$194400 (192000+6400-4000)