Question

Assume that, on January 1, 2021, Sosa Enterprises paid $3,000,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2018, the book value of Orioles’ identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles’ fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Orioles during 2018:
Net Income $600,000
Dividends declared and paid $360,000
Market price of common stock on 12/31/2018 $80/share

Required:
What amount would Sosa Enterprises report in its year-end 2018 balance sheet for its investment in Orioles Co.?

Answer 1

Answer:

Acquisition price for 30% share          $3,000,000

($36,000 / $120,000 * 100)

Add: Net income                                   $180,000

($600,000 * 30%)

Less: dividend                                       ($108,000)

($360,000 * 30%)

Less: excess depreciation                    -($45,000)

($1,200,000 / 8 yrs*30%)

Investment reported in Balance         $3,027,000

Sheet 2018