Hi everyone, Can anyone help me with this question? The answer is “D”. Do we need to recognize the goodwill under the equity method??
Bang Inc. acquired 40% stake in Boom Inc. for $120,000 in the beginning of year 1. None of the other investors have more than 20% stake in Boom Inc. The book value and fair value of Boom Inc. is $200,000 and $250,000 respectively. The difference in the book value and fair value is attributable to higher fair value of equipment by $30,000 and land by $20,000. The equipment is depreciated over next 10 years using straight line method. Goodwill is also impaired by 10% during the year and the land is also sold by Boom Inc. If Boom Inc. declares a dividend of $10,000 out of the total earnings of $80,000, what would be the investment income (or charge) recorded in the statement of income of Bang Inc. for the year concerning the investment in Boom Inc?
Impairment of goodwill = 10% of $20,000 = $2,000.
Depreciation on increased fair value of equipment (Bang Inc’s share) = 40% x $30,000 / 10 years = $1,200.
No depreciation is charged on land. Land is sold during the year. Bang Inc. will write off its share of increased fair value of land, i.e. $8,000 (i.e. $20,000 x 40%).
Equity in earnings=$2,000 + $1,200 + $8,000
No, goodwill is not recognized under the equity method, you recognize under the consolidation method. Remember, goodwill arises when a company purchases FV of equity of an another company. The difference between the purchase price and the fv of equity is the goodwill. If the purchase price is less than the fv of equity, then the company would recognize as a gain.
The question is asking for the investment income which means goodwill is not included since goodwill belongs under the balance sheet.