On 1 January 2011, Wicker Company acquired a 25% interest in Foxworth Company (both companies are fictitious) for €1,000,000 and used the equity method to account for its investment. The book value of Foxworth’s net assets on that date was €3,800,000.

An analysis of fair values revealed that all fair values of assets and liabilities were equal to book values except for a building. The building was undervalued by €40,000 and has a 20-year remaining life. The company used straight-line depreciation for the building.

Foxworth paid €3,200 in dividends in 2011. During 2011, Foxworth reported net income of €20,000. During the year, Foxworth sold inventory to Wicker. At the end of the year, there was €8,000 profit from the upstream sale in Foxworth’s net income. The inventory sold to Wicker by Foxworth had not been sold to an outside party.

1. Calculate the equity income to be reported as a line item on Wicker’s 2011 income statement.

2. Calculate the balance in the investment in Foxworth to be reported on the 31 December 2011 balance sheet.

Transcribed Image Text:

Purchase price Acquired equity in book value of Foxworth's net assets (25% 3,800,000) Excess purchase price Attributable to: Building (25% 40,000) Goodwill (residual) 1,000,000 950,000 50,000 10,000 40,000 50,000