On January 1, 2013, an investor purchases 15,000 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.
$190,000
$182,400
$172,400
$168,000
Since the investor hold 20 %shares or voting rights in investee company, it should be accounted under equity method.
Original investment 15000 shares *12$ = $ 180000
Add: Eligible dividend. $42000 *20% = $ 8400
Less: Dividend Paid. $20000 *20% = $ 4000
Less: Customer list share $50000*(1/5)*20% = $ 2000
Investment in Investee Account. = $ 182400
In equity method the dividend paid should be deducted and eligible dividend should be added to the investment account.
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