On January 1 2010 Mehan Incorporated purchased 15000 shares

On January 1, 2010, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a l 5% ownership of Cook. On January 1, 2011 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave influence over Cook. The book value of Cook on January 1, 2010, was $1,000,000. The book value of le the bil tytoapply ign cant Cook on January 1, 2011, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends $200,000 $50,000 2010 50,000 60,000 2011 225,000 250,000 2012 On April 1, 2012, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. 8. What is the balance in the investment account at December 31, 2010? A) $150,000. B) $172,500. C) $180,000 D) $157,500. E) $170,000 9. How much income did Mehan report from Cook during 2011? A) $90,000. B) $110,000. C) $67,500. D) $87,500. E) $78,750.

Solution

(8) The balance in the Investment on 31 December, 2010 = $150000

Option A is correct

(9) Income reported during 2011 :

Net Income during 2011 = 225000 * 40% = 90000

Purchase additional shares for = 300000

Book value on 1 jan 2011 = 1150000

1150000 * 25% = 287500

Amount need to be amortised = 300000 – 287500 = 12500

Amt amorise in 2011 = 12500/5 = 2500

Income reported during 2011 = 90000 – 2500 = $87500

Option D is correct