Question - Advanced Accounting - The Equity Method of Accounting for Investment.
On January 3, 2013, Matteson Corporation acquired 30 percent of the outstanding common stock of O'Toole Company for $1,261,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $841,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2013, O'Toole reported net income of $321,000 and paid cash dividends of $35,000. At December 31, 2013, what should Matteson report as its investment in O'Toole under the equity method?
Investment:
On January 1, 2012, Alison, Inc., paid $83,800 for a 40 percent interest in Holister Corporation's common stock. This investee had assets with a book value of $290,500 and liabilities of $117,000. A patent held by Holister having a $13,600 book value was actually worth $31,600. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill.
During 2012, Holister earned income of $40,700 and paid dividends of $14,000. In 2013, it had income of $70,000 and dividends of $19,000. During 2013, the fair value of Allison's investment in Holister had risen from $95,380 to $106,180.
a. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2013?
b. Assuming Alison uses the fair-value option, what income from the investment in Holister should be reported for 2013?