Question

(Change from Fair Value to Equity) On January 1, 2017, Beyonce Co. purchased 25,000 shares (a 10% interest) in Elton John Corp. for \(1,400,000.

At the time, the book value and the fair value of John’s net assets were \)13,000,000. On July 1, 2018, Beyonce paid \(3,040,000 for 50,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John’s identifiable assets net of liabilities was equal to their carrying amount of \)14,200,000. As a result of this transaction, Beyonce owns 30% of John and can exercise significant influence over John’s operating and financial policies.

John reported the following net income and declared and paid the following dividends.

Net Income Dividend per Share

Year ended 12/31/17 \(700,000 None

Six months ended 6/30/18 500,000 None

Six months ended 12/31/18 815,000 \)1.55

Instructions

(Any excess fair value is attributed to goodwill.) Determine the ending balance that Beyonce Co. should report as its investment in John Corp. at the end of 2018

Short answer

The carrying value of the investment at the end of 2018 will be $4,688,250.

Step-by-step solution

Calculation for 2017

	Explanation	Amount ($)
Share of Beyonce Co	700,000*10%	70,000
Purchase price of Investment		1,400,000
Half net income	500,000*10%	50,000
Total carrying amount		1,520,000

Calculation for 2018

	Explanation	Amount ($)
Total investment will be	1,520,000+3,040,000	4,560,000
Share in net income	815,000*30%	244,500
Dividend Received	1.55*25000*3	-116,250
Carrying amount at the end of 2018		4,688,250