Can someone help me with this consolidation problem…
Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2 of the current year for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five year life. During the year, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its year-end income statement?
A. $40,000
B. $52,000
C. $56,000
D. $60,000
I thought the answer was D, as this would be an equity method investment (over 20%, less than 50%), and you report equity in earnings of subsidiaries.
The explanation says
“Straw's fair value is $900,000 + $100,000 = $1,000,000. Puff's investment in Straw is 40% x $1,000,000 = $400,000, the same as the purchase price. Puff offsets its share of Straw's income with the depreciation of its share of the difference in the carrying and fair value of equipment. [$150,000 – ($100,000 / 5 years)] x 40% = $52,000.”
????? You take our Excess FMV of property and net against net income for the equity method?? Ive only ever depreciated those assets when preparing consolidated statements, until now.
REG - 92
AUD - 90
BEC - 82
FAR - 82
BISK Review Materials
DONE! /Happydance
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