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.?

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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