On January 1 2012 Dawson Incorporated paid 100000 for a 30 i

On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The balance in the Investment in Sacco account at December 31, 2012, is $112.000 O $107,500 O $100,000 $106,000 O $140,000

Solution

The Balance in Investment in Sacco Accounts = $107,500

The Balance in Investment in Sacco Accounts = Amount Paid for Investment + Equity Income - Excess Patent Amortization + Share of Dividend paid in 2012

Equity Income = [ $50,000 × 30% ] = $15,000

Excess Patent Amortization = [ ($40,000 – 10,000) / 6 Years = $1,500

Share of Dividend paid = $20,000 x 30% = $6,000

Therefore , The Balance in Investment in Sacco Accounts

= $100,000 + 13,500 + 6,000

= $107,500