On January 1,2008,Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000.At the time of the combination,Tester reported common stock outstanding of $200,000 and retained earnings of $150,000,and the fair value of the noncontrolling interest was $100,000.The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value.The patents had a remaining economic life of ten years at the date of the business combination.Tester reported net income of $40,000 and paid dividends of $10,000 during 2008.
-Based on the preceding information,what balance will Ramon report as its investment in Tester at December 31,2008,assuming Ramon uses the equity method in accounting for its investment?

Question

Quizplus · Accepted Answer

The correct answer is A.The investment in Tester at December 31, 2008, is $318,750. This is calculated as follows:Purchase price of 75% of Tester's voting common stock = $300,000Fair value of noncontrolling interest = $100,000Total fair value of Tester = $400,000Excess of fair value over book value of patents = $50,000Book value of Tester's net assets = $350,000Total fair value of Tester's net assets = $400,000Ramon's share of Tester's net income for 2008 = 75% x $40,000 = $30,000Ramon's share of Tester's dividends for 2008 = 75% x $10,000 = $7,500Investment in Tester at December 31, 2008 = $300,000 + $30,000 - $7,500 = $318,750

On January 1,2008,Ramon Corporation Acquired 75 Percent of Tester Company's