Question

On January 1, 2020, Blue 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 $14,100,000.

On July 1, 2021, Blue paid $2,920,000 for 48,000 additional shares of John common stock, which represented a 20% investment in John. As a result of this transaction, Blue 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

$690,000 None
Six months ended 6/30/21

480,000 None
Six months ended 12/31/21

800,000 $1.55

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

Investment in Elton John Corp. $Enter the investment in Elton John Corp. in dollars

Answer 1

Answer:

$4,465,400

Explanation:

The investment in Elton in 2020                          $1,300,000

share of 2020 net income(10%*$690,000)               $69,000

ending balance of investment in 2020                 $1,369,000

Share of net income 6/30/21 ($480,000*10%)          $48,000

ending balance of investment 6/30/21                   $1,417,000

Acquisition of investment 7/1/2021                         $2,920,000

Total amount of investment                                     $4,337,000

share of net income 12/31/2021($800,000*30%)       $240,000

Dividends received(48,000+24,000)*$1.55                ($111,600)

balance of investment in Elton John Corp                 $4,465,400

In computing the above value,at each point in time the share of Blue Co from net income earned by Elton john corp is added while any dividends received in cash is deducted.