Joined: 24 Apr 2010 Location: United States
Online Status: Offline Posts: 23
Posted: 09 Jul 2010 at 01:28 | IP Logged
Hello,
I am able to under the logic behind a becker question as mentioned below.
Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, 2001 for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. During 2001, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its 2001 income statement? a. $40,000 b. $52,000 c. $56,000 d. $60,000
Joined: 15 Oct 2009
Online Status: Offline Posts: 238
Posted: 09 Jul 2010 at 02:11 | IP Logged
It is b because there is excess depreciation that reduces your income from equity investments. Equipment has 5 year useful life so divide 100 by 5 and multiply by your 40% ownership and deduct from 60
Joined: 15 Oct 2009
Online Status: Offline Posts: 238
Posted: 09 Jul 2010 at 17:41 | IP Logged
Do not get confused with trading securities. That's a different story :) When using equity method, you bought securities and FV of equipment was higher than book value. Since the Sub depreciates equipment based on historical cost, you need to reduce your income by the difference of FV and BV of equipment. You measure that excess when you bought the equity investments, not every year. Hope this makes sense.
You cannot post new topics in this forum You cannot reply to topics in this forum You cannot delete your posts in this forum You cannot edit your posts in this forum You cannot create polls in this forum You cannot vote in polls in this forum
Active Topics 
Memberlist 
Search 
Help
Register 
Login
Topic: Marketable securities - Equity Method
Topic Closed)
