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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