Question

Assume that, on January 1, 2021, Sosa Enterprises paid $2,240,000 for its investment in 30,000 shares...

Assume that, on January 1, 2021, Sosa Enterprises paid $2,240,000 for its investment in 30,000 shares of Orioles Co. Further, assume that Orioles has 100,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets.

At January 1, 2021, the book value of Orioles' identifiable net assets was $7,260,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,950,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction.

The following information pertains to Orioles during 2021:

Net Income $ 500,000
Dividends declared and paid $ 300,000
Market price of common stock on 12/31/2021 $ 80 /share


What amount would Sosa Enterprises report in its year-end 2021 balance sheet for its investment in Orioles Co.?

Homework Answers

Answer #1

Solution:

Investment in Orioles =30,000 shares / 100,000 shares = 30%

Difference between fair value and the book value attributable to depreciable assets = $10,000,000 -$7,260,000 -$1,950,000

=$790,000

Balance sheet for its investment in Orioles:

Particulars Amount
Cash paid to Orioles $2,240,000
Add: net income (500,000 *30%) $150,000
Less: Dividends(300,000 *30%) ($90,000)
Less: Attributable to depreciation assest [(790,000 /8years)*30%] ($29,625)
Amount Sosa Enterprises report in its year-end 2021 balance sheet for its investment in Orioles $2,270,375

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