Question

1. On January 1, 20X5, AKM Corp. paid $450,000 cash to acquire 25% of the common shares of GKM Corp. At the time of acquisition, the carrying value of GKM’s common shares was $500,000, and its retained earnings were $1,200,000. The fair values of the identifiable net assets (INA) approximated their carrying values except for a patent whose fair value was $20,000 higher than its carrying value. The patent has a five-year remaining useful life, and straight-line depreciation is used. GKM paid dividends of $40,000 in 20X5 and reported net income of $120,000. What amount would be reported on AKM’s income statement related to its investment in GKM for 20X5? a) Investment income of $19,000 b) Investment income of $26,000 c) Investment income of $29,000 d) Investment income of $31,000.

Answer 1

	Amount in $
Net Income of GKM	120,000
Less: Patent annual amortization	4,000
( 20,000 / 5 )
Adjusted Net Income of GKM	116,000
Investment income in Income statement for 20X5	$ 29,000	( 116,000 x 25% )
Correct answer is option C ( i.e Investment income of $29,000 ).