22. On January 1, 2015 R paid $22,752,000 for 360,000 of the 600,000 shares of Door's outstanding common stock. At the time of the acquisition, the fair value of Door’s net assets was $37,920,000 while the book value of Door’s net assets was $35,920,000. The difference between Door’s fair value and book value of its net assets was due to the following (1) the fair value of several fixed assets was $1,500,000 higher than the assets’ book value; the fixed assets have a 5-year remaining useful life; and (2) the fair value of inventory was $500,000 higher than the inventory’s carrying value; all of that inventory was sold during 2015. Both R and Door depreciate fixed assets using a straight-line method and both assume no salvage value. Also, both R and Door use a FIFO inventory costing method.

• During 2015, D reported net income of $2,700,000 and paid $200,000 of dividends to all of its shareholders.
• During 2016, D reported a net loss of $100,000 but still and paid $210,000 of dividends to all of its shareholders.
• As of December 31, 2015 and 2016, the fair market value of one share of D’s stock was $65 and $68, respectively.

Assume R’s interest in D gives R the ability to exercise significant influence over D’s operating and financial policies.

• Prepare the entry R should make on January 1, 2015 for the purchase of this investment.
• Prepare any additional entry(ies) R should make during 2015 and 2016 related to its investment in D.
• Before income taxes, what should R report in its 2015 and 2016 income statements as a result of its investment in D? Clearly describe what and how much R should report.
• What should be the carrying amount of R’s investment on its 2015 and 2016 balance sheets?

Answer rating: 100% (QA)

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