Question

Assume that, on January 1, 2021, Sosa Enterprises paid $2,240,000 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 $7,260,000, 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 $1,950,000 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 /shareWhat amount would Sosa Enterprises report in its year-end 2021 balance sheet for its investment in Orioles Co.?

Answer 1

Answer:

Amount  reported in the year-end 2021 is  $2,270,375

Explanation:

$\text{The percentage of investment in Orioles} = \frac{30000 \ shares }{100000 \ shares} = 30 \ percent.$

The difference between fair value and the book value attributable to depreciable assets = $10,000,000 -$7,260,000 -$1,950,000

=$790,000

Attributable to depreciation assets:

$= \frac{790000}{8 \ years} \times 30 percent$

$= 29625 dollars.$

Balance sheet for its investment in Orioles:

Particulars                                                        Amount

Cash paid to Orioles                           =             $2,240,000

Add: net income (500,000 *30%)       =            $150,000

Less: Dividends(300,000 *30%)         =           ($90,000)

Less: Attributable to depreciation.      =           ($29,625)

Amount  reported in the year-end 2021. =       $2,270,375