Guys,
These are the type of questions that will trip me up! I know that I can read too much into a question but it becomes very frustrating!! It is not that I do not know the concept, it is that I do not understand the question.
Example:
Sage, Inc. bought 40% of Adams Corp's outstanding common stock on Jan. 2, Year 1 for $400,000. The carrying amount of Adams' net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amount by $90,000 and $10,000 respectively. The plant has an 18-year life. All inventory was sold during Year 1. During Year 1, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended Dec. 31, Year 1?
a. $48,000
b. $42,000
c, $36,000
d. $32,000
To me I understand “Net Income” to mean the bottom line. I would have thought that income would have already been adjusted for the fair value of plant and inventory before net income. The correct answer is (b).
Help me out guys. What do you think?
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