Fair values and equity method


Waters, Inc., acquired 10 percent of Denton Corporation on January 1, 2012, for $297,400 although Denton's book value on that date was $2,380,000. Denton held land that was undervalued by $144,000 on its accounting records. During 2012, Denton earned a net income of $326,000 while paying cash dividends of $122,000. On January 1, 2013, Waters purchased an additional 30 percent of Denton for $840,510. Denton's land is still undervalued on that date, but then by $172,700. Any additional excess cost was attributable to a trademark with a 10-year life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2013, Denton reported income of $407,500 and distributed dividends of $153,000.

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Accounting Basics: Fair values and equity method
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