Answer:
a. $728,000.
Explanation:
Step 1: Calculation of excess cost over book value to patent
Patent = Acquisition cost - Book value of acquired net assets
= $700,000 - [$3,900,000 - $900,000) × 20%]
= $700,000 - $600,000
= $100,000
Annual amortization of the patent for 10 years = $100,000 ÷ 10 = $10,000
Step 2: Calculation of equity balance
The equity balance of Domingo is calculated as follows:
Equity balance = Acquisition price + 2014 accrual income share + 2015 Income share - 2014 patent amortization - 2015 patent amortization - 2014 share of dividend - 2015 share of dividend
Equity balance = $700,000 + ($170,000 × 20%) + ($210,000 × 20%) - $10,000 - $10,000 - ($70,000 × 20%) - ($70,000 × 20%)
Equity balance = $700,000 + $34,000 + $42,000 - $10,000 - $10,000 - $14,000 - $14,000
Equity balance = $728,000
Therefore, he equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2015 is equal to $728,000.
