The following information applies to Questions 32 - 34
On January 1, 20X2, Ephraim Corporation acquired 80 percent of Lilac Corporation for $200,000 cash. Lilac reported net income of $25,000 each year and dividends of $5,000 each year for 20X2, 20X3, and 20X4. On January 1, 20X2, Lilac reported common stock outstanding of $160,000 and retained earnings of $40,000, and the fair value of the noncontrolling interest was $50,000. It held land with a book value of $90,000 and a market value of $100,000, and equipment with a book value of $40,000 and a market value of $48,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of eight years. All depreciable assets held by Lilac at the date of acquisition had a remaining economic life of eight years. Ephraim uses the equity method in accounting for its investment in Lilac.
-Based on the preceding information,what balance would Ephraim report as its investment in Lilac at January 1,20X5?
A) $236,000
B) $248,000
C) $260,000
D) $300,000

Question

Quizplus · Accepted Answer

The investment in Lilac is increased by Ephraim's share of Lilac's net income and decreased by Ephraim's share of Lilac's dividends. Ephraim's share of Lilac's net income for each year is 80% x $25,000 = $20,000. Ephraim's share of Lilac's dividends for each year is 80% x $5,000 = $4,000. Therefore, the investment in Lilac at January 1, 20X5 is $200,000 + (3 x $20,000) - (3 x $4,000) = $236,000.

The Following Information Applies to Questions 32 - 34