Question

A subsidiary, Boston Corp., is wholely acquired by Massachusetts Co. on January 1, 2015 for $10 million. The subsidiary’s book value at the date of acquisition was $2 million. Following is the information for the subsidiary’s identifiable net assets at the date of acquisition: Fair Value Excess Inventories is overvalued (i.e., book value > fair value): $ 200,000 FIFO Identifiable intangibles is undervalued: $ 5,000,000 Straight-line, 5 years Long-term debt is undervalued: $ 300,000 Straight-line, 2 years Inventories (based on FIFO costing assumption) are sold in 2015. The subsidiary did not declare any dividends during this period, and reported no other comprehensive income. The subsidiary reported net income as follows: Year Net Income 2015 $1,500,000 2016 2,500,000 2017 2,000,000 The parent uses the equity method to report its investment on its own books. Equity in the Subsidiary's net income for 2015, reported on the parent’s books, is:

A. $150,000

B. $2,150,000

C. $850,000

D. $1,050,000

Answer 1

subsidiary, Boston Corp., is wholely acquired by Massachusetts Co. on January 1, 2015 for $10 million. The subsidiary’s book value at the date of acquisition was $2 million. Following is the information for the subsidiary’s identifiable net assets at the date of acquisition: Fair Value Excess Inventories is overvalued (i.e., book value > fair value): $ 200,000 FIFO Identifiable intangibles is undervalued: $ 5,000,000 Straight-line, 5 years Long-term debt is undervalued: $ 300,000 Straight-line, 2 years Inventories (based on FIFO costing assumption) are sold in 2015. The subsidiary did not declare any dividends during this period, and reported no other comprehensive income. The subsidiary reported net income of Option C. $ 850,000