In January 2014, Harold Corporation acquired 20% of Otis Company’s outstanding common stock for $400,000. This investment gave Harold the ability to exercise significant influence over Otis. The book value of these shares was $300,000. The excess of cost over book value was attributed to an identifiable intangible asset, a patent, which was undervalued on Otis’s balance sheet and had a remaining 10-year useful life.
For the year ended December 31, 2014, Otis reported net income of $90,000 and paid cash dividends of $20,000 on its common stock.
1. How much would Harold Corporation’s income increase in 2014 as a result of its investment in Otis?
2. What is the carrying value of Harold’s investment in Otis Company at December 31, 2014?