Question

Assume that, on January 1, 2021, Sosa Enterprises paid $2,120,000 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 $7,140,000, 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 $1,850,000 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.?

Multiple Choice

• $2,233,625.

• $2,142,125.

• $2,270,000.

• $2,286,667.

Answer 1

Answer = $2,142,125

Note:

Percentage of holding held by Sosa enterprise in orioles.co. = 30,000 / 100,000 = 30%

The amount that would be reported by Sosa enterprise for the year ending 2021in it's balance sheet for its investment in Orioles.co.

= Amount paid for investment + 30% of net income - 30% of dividends paid - 30% of additional depreciation.

= $2,120,000 + (30% $500,000) - (30% $300,000) - (30% $126,250)

= $2,120,000 + $150,000 - $90,000 - $37,875

= $2,142,125

Explanation:

Depreciation assets = Total fair value - identifiable assets - amount belongs to land

Depreciation assets = $10,000,000 - $7,140,000 - $1,850,000

Depreciation assets = $1,010,000

Depreciation amount = $1,010,000 / 8 years = $126,250