Question

On 1/1/19, Major Company purchased 10% of Minor Company's common stock for $100,000. Minor's book value of equity at that date consisted of $200,000 common stock and $450,000 retained earnings. On 1/1/19, the difference between the fair value and book value of equity of Minor's stock is attributable to land for $100,000 and the remaining difference is attributable to equipment. The equipment has a 10 year remaining life at 1/1/19.  

During 2019, Minor reported income of $150,000 and paid dividends of $50,000. The fair value of Major’s investment in Minor stock on 12/31/19 is $125,000.

Assuming that Major is investing in Minor because it has excess cash and thinks Minor stock price prospects are good, answer the following questions (use the $XXX,XXX) format. The investment will be sold within a month after year-end. Round to the nearest dollar.

The total asset amount related to the Investment in Minor on Major’s 12/31/2019 balance sheet is ________

The Minor investment increased Major's retained earnings (after closing) at 12/31/19 by __________

Answer 1

The total asset amount related to the Investment in Minor on Major's 12/31/2019 balance sheet is 100,000 $

The Minor Investment increased Major's retained earnings (after closing) at 12/31/2019 by 30,000 $ (25,000 $ + 5,000 $)

Investment in Minor increased in value post-acquisition by 25,000 $ which can be credited in P&L Account and transferred to Retained Earnings under cost method.

Dividend payout by Minor is 50,000 $, 10% of which will be paid to Major Company, i.e. 5,000 which is credited to P&L being post acquisition and transferred to Retained Earnings under cost method.