Question

On January 1, 2020, Sweet Co. purchased 24,000 shares (a 10% interest) in Elton John Corp. for $1,300,000. At the time, the book value and the fair value of John’s net assets were $12,900,000.

On July 1, 2021, Sweet paid $2,890,000 for 48,000 additional shares of John common stock, which represented a 20% investment in John. As a result of this transaction, Sweet owns 30% of John and can exercise significant influence over John’s operating and financial policies. (Any excess fair value is attributed to goodwill.)

John reported the following net income and declared and paid the following dividends.

		Net Income		Dividend per Share
Year ended 12/31/20		$650,000		None
Six months ended 6/30/21		470,000		None
Six months ended 12/31/21		776,000		$1.50

Determine the ending balance that Sweet Co. should report as its investment in John Corp. at the end of 2021.

Investment in Elton John Corp.

$

Answer 1

1. Balance of John Investment before purchase of additional shares = Cash paid + Net income attributable in Dec 2020 + Net income attributable in June 2021

Balance of John Investment before purchase of additional shares = 1300000 + 650000 * 10% + 470000 * 10%

Balance of John Investment before purchase of additional shares = $1412000

2. Balance of John Investment on Dec 2021 = Balance till June 30 + Additional Purchase + Net income attributable in Dec 2021 - Dividends Received

Balance of John Investment on Dec 2021 = 1412000 + 2890000 + 776000*30% - 72000*1.50

Balance of John Investment on Dec 2021 = 1412000 + 2890000 + 232800 - 108000

Balance of John Investment on Dec 2021 = $4426800

Investment in Elton John Corp = $4426800

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