Part 1On January 2, year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod's stockholders' equity was $500,000. The carrying amounts of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in subsidiary? Part 1
A. $280,000 B. $210,000 C. $270,000 D. $220,000

Question

Part 1On January​ 2, year​ 1, Kean Co. purchased a​ 30% interest in Pod Co. for​ $250,000. On this​ date, Pod's​ stockholders' equity was​ $500,000. The carrying amounts of​ Pod's identifiable net assets approximated their fair​ values, except for land whose fair value exceeded its carrying amount by​ $200,000. Pod reported net income of​ $100,000 for year​ 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December​ 31, Year​ 1, balance​ sheet, what amount should Kean report as investment in​ subsidiary? Part 1
A. ​$280,000 B. ​$210,000 C. ​$270,000 D. ​$220,000

BlackTom AI · Accepted Answer

Question restatement:
- Kean Co. buys 30% of Pod Co. on Jan 2 for $250,000.
- Pod’s stockholders’ equity on that date is $500,000.
- Pod’s identifiable net assets are at fair value except land, which is $200,000 higher than carrying amount.
- Pod reports net income of $100,000 for year 1; no dividends are paid.
- Kean uses the equity method. What is the amount Kean should report as Investment in Pod on Kean’s Dec 31, Year 1 balance sheet?
Options:
A. $280,000
B. $210,000
C. $270,000
D. $220,000

Option-by-option analysis:
Option A: $280,000
This would be calculated as initial investment ($250,000) plus Kean’s share of Pod’s year 1 net income (30% of $100,000 = $30,000), with no adjustment for the fair-value increase of land. Under the equity method, Kean records its share of Pod’s post-acquisition net income, which indeed increases the investment by $30,000. The question is whether the $200,000 land fair-value uplift (and the resulting $60,000 share) should also increase the investment in Year 1. In year 1, the share of that FV adjustment affects Pod’s reported net income only insofar as it changes earnings through depreciation or other post-acquisition accounting effects in subsequent periods; the stated Pod net income of $100,000 for year 1 already reflects the current-period performance, including any amortization of the fair-value uplift. Consequently, the year 1 investment balance increases by $30,000, yielding $280,000. This aligns with standard equity-method practice for the first year post-acquisition when the question explicitly provides Pod’s year-1 net income.
Option B: $210,000
This would imply subtracting $40,000 of something (e.g., subtracting the entire impact of the FV uplift or subtracting a portion of income). Neither is correct: there is no basis for reducing the investment for year 1 by $40,000 under the given facts, since there were no dividends and the net income increase is positive. The FV uplift’s effect on the year-1 income is already captured in Pod’s $100,000 net income only to the extent it has that impact on earnings; the problem’s data do not justify a separate deduction here.
Option C: $270,000
This would correspond to initial $250,000 plus $20,000 of income, which would be 20% of $100,000, not 30% (or a partial recognition of the FV uplift). Since Kean owns 30%, the correct share of Pod’s year-1 net income is $30,000, not $20,000. The misapplication here likely stems from incorrectly allocating the share of income or ignoring the full 30%.
Option D: $220,000
This would result from adding only $0 or subtracting $30,000 from the initial investment, or perhaps ignoring the net income entirely and then subtracting something else. It contradicts the data: Kean does have a 30% share of Pod’s $100,000 net income, which increases the investment by $30,000, so the balance cannot be as low as $220,000 when starting from $250,000 with no dividends.

Summary:
- Under the equity method, Kean’s investment increases by its share of Pod’s net income (30% of $100,000 = $30,000) for year 1, and there are no dividends to reduce the investment.
- The land fair-value uplift ($200,000) affects Pod’s net assets and will influence future earnings (and depreciation) but, in year 1, the stated net income already reflects current-period performance; the problem’s data lead to recognizing only the $30,000 income effect on the investment balance for year 1.
- Therefore, the year-end Investment in Pod should be $250,000 + $30,000 = $280,000.

Homework:practice exam 2

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