Question

Hamza Inc. acquired all of the outstanding common stock of Ali Corp. on January 1, 2016,...

Hamza Inc. acquired all of the outstanding common stock of Ali Corp. on January 1, 2016, for $372,000. Equipment with a ten-year life was undervalued on Ali's financial records by $46,000. Hamza also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. (USE THIS TABLE TO ANSWER THE NEXT TWO Q’s)


Ali Co. earned reported net income of $180,000 in 2016 and $216,000 in 2017.  Dividends of $70,000 were paid in each of these two years.  Selected account balances as of December 31, 2018, for the two companies follow.

  Hamza Co

Ali Co

Revenues

$1,080,000

$840,000

Expenses

480,000

600,000

Investment income

Not given

0

Retained earnings, 1/1/18

840,000

600,000

Dividends paid

132,000

70,000

If the equity method had been applied, what would be the Investment in Ali Corp. account balance within the records of JE at the end of 2018?

A.

$744,000.
B.

$372,000.
C.

$774,150.
D.

$612,100.
E.

$844,150.
Business   Accounting   
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Answer #1

The computation of Investment in Ali Corp. account balance is shown below:-

Initial investment = $372,000

Entries in 2016 = $180,000 - $70,000 - ($216,000 - $180,000 / 2)

= $180,000 - $70,000 - $18,000

= $92,000

Entries in 2017 = $216,000 - $70,000 - ($216,000 - $180,000 / 2)

= = $216,000 - $70,000 - $18,000

= $128,000

Entries in 2018 = ($840,000 - $600,000) - $70,000 - ($216,000 - $180,000 / 2)

= $240,000 - $70,000 - $18,000

= $152,000

Investment = Initial investment + Entries in 2016 + Entries in 2017 + Entries in 2018

= $372,000 + $92,000 + $128,000 + $152,000

= $744,000

So, the correct option is A.

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