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. $270,000 B. $220,000 C. $280,000 D. $210,000

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. ​$270,000 B. ​$220,000 C. ​$280,000 D. ​$210,000

BlackTom AI · Accepted Answer

Question restatement: Kean Co. acquired a 30% stake in Pod Co. for 250,000 on January 2. Pod’s equity at purchase was 500,000, with identifiable net assets fair value adjustments: land fair value exceeds carrying amount by 200,000. Pod earned 100,000 net income in Year 1 and paid no dividends. Under the equity method, what should Kean report as its Investment in Pod at December 31, Year 1?

Option A: 270,000. This would imply that Kean’s investment increased by only 20,000 from the initial 250,000. However, under the equity method, Kean recognizes 30% of Pod’s Year 1 net income, which is 30,000, not 20,000, so this amount understates the investment.

Option B: 220,000. This would represent a decrease from the initial investment, which would only occur if Kean had absorbed a loss or paid dividends; but Pod paid no dividends, and Pod posted net income, which increases Kean’s investment under the equity method. Therefore this is incorrect.

Option C: 280,000. Under the equity method, Kean increases its investment by its share of Pod’s net income: 30% of 100,000 = 30,000. The initial investment is 250,000, so 250,000 + 30,000 = 280,000. The fair value adjustment for land (200,000) increases Pod’s net assets, but does not require amortization to income because land typically is not depreciated, so there’s no additional subtraction here. Since there were no dividends, there is no offset to the investment.

Option D: 210,000. This would equal 30% of Pod’s post-acquisition fair value net assets (210,000) but does not reflect the investor’s initial investment of 250,000 or the subsequent recognition of net income via the equity method. It misinterprets the accounting treatment by mixing the concept of ownership share of net assets with the actual carrying amount of the investment.

Why the correct choice is C: The equity method starts with the initial investment of 250,000. Each period, you add the investor’s share of the subsidiary’s net income (30,000 in Year 1) and subtract any dividends received (none in this case). The land fair value above carrying amount increases the subsidiary’s net assets, but because land is not depreciated, there is no amortization affecting net income attributable to the investor in Year 1. Therefore, ending investment equals 250,000 + 30,000 = 280,000.

Summary: The only option that correctly incorporates the initial investment and the investor’s share of Year 1 net income under the equity method, without requiring amortization of land for this scenario, is option C, 280,000.

Homework:practice exam 2

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