[jessanqi]

Hi, why there is no amortization need? the question told the the barcero’s net assets has a book value is $620,000, why don’t calculate the book value of 30% of net asset and use the cost over the book value to amortize???

Thank you in advance!!!!!

On January 2, 20X5, Portela, Inc., bought 30% of the outstanding common stock of Bracero Corporation for $258,000 cash. Portela accounts for this investment by the equity method. At the date of acquisition of the stock, Bracero’s net assets had a book and fair value of $620,000. The excess of Portela’s cost of the investment over its share of Bracero’s net assets had an estimated life of 40 years. Bracero’s net income for the year ended December 31, 20X5, was $180,000. During 20X5, Bracero declared and paid cash dividends of $20,000. On December 31, 20X5, Portela should have carried its investment in Bracero (assuming the fair value option is not elected) in the amount of

A. $258,000
B. $312,000
C. $304,200
D. $306,000

Explanation

The correct answer is D. An investor, who owns 20% of more of an interest in the stock of another company is presumed to be able to exercise significant influence and must carry the investment under the equity method. Under the equity method, an investor recognizes its share of the earnings or losses of an investee in the periods for which they are reported, rather than in the period in which an investee declares a dividend. Dividends received from an investee reduce the carrying amount of the investment. Based on this requirement, we have as follows:
Original cost of investment $258,000
Add: Income of the investee:
30% × $180,000
$54,000

$312,000
Less: Dividends declared and paid:
30% × $20,000 (6,000)
Investment account at December 31, 20X5 $306,000

Note: The additional information given in the question about the estimated life of 40 years is not needed to solve the question, because there is no amortization needed to figure what Portela’s investment in Bracero should be carried at, which is what the question is asking. They do not tell you the excess cost over Bracero’s net assets. Furthermore, if there was excess cost over the FMV of net assets, then that is known as goodwill and goodwill is no longer amortized on the books.