eview of pre-consolidation equity method (controlling investment in affiliate, fair value differs from book value) Assume an investee has the following financial statement information for the three years ending December 31, 2019: (At December 31) 2019 2018 2017 Current assets $285,000 $277,500 $207,000 Tangible fixed assets 662,500 575,000 563,000 Intangible assets 40,000 45,000 50,000 Total assets $987,500 $897,500 $820,000 Current liabilities $120,000 $110,000 $100,000 Noncurrent liabilities 266,250 242,500 220,000 Common stock 100,000 100,000 100,000 Additional paid-in capital 100,000 100,000 100,000 Retained earnings 400,000 345,000 300,000 Stockholders' equity 600,000 545,000 500,000 Total liabilities and equity $986,250 $897,500 $820,000 (For the years ended December 31) 2019 2018 2017 Revenues $970,000 $920,000 $850,000 Expenses 875,000 840,000 775,000 Net income $95,000 $80,000 $75,000 Dividends $40,000 $35,000 $25,000 Assume that on January 1, 2017, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee’s identifiable net assets had fair values that approximated their historical book values. In addition, the acquisition resulted in no goodwill or bargain purchase gain recognized in the consolidated financial statements of the investor company. Assuming that the investor company uses the equity method to account for its investment in the investee, what is the balance in the “investment in investee” account in the investor company’s pre- consolidation balance sheet on December 31, 2019? $987,500 $450,000 $500,000 $600,000

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 23E

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Review of pre-consolidation equity method (controlling investment in affiliate, fair value differs from book value)

Assume an investee has the following financial statement information for the three years ending December 31, 2019:

(At December 31)	2019	2018	2017
Current assets	$285,000	$277,500	$207,000
Tangible fixed assets	662,500	575,000	563,000
Intangible assets	40,000	45,000	50,000
Total assets	$987,500	$897,500	$820,000
Current liabilities	$120,000	$110,000	$100,000
Noncurrent liabilities	266,250	242,500	220,000
Common stock	100,000	100,000	100,000
Additional paid-in capital	100,000	100,000	100,000
Retained earnings	400,000	345,000	300,000
Stockholders' equity	600,000	545,000	500,000
Total liabilities and equity	$986,250	$897,500	$820,000

(For the years ended December 31)	2019	2018	2017
Revenues	$970,000	$920,000	$850,000
Expenses	875,000	840,000	775,000
Net income	$95,000	$80,000	$75,000
Dividends	$40,000	$35,000	$25,000

Assume that on January 1, 2017, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee’s identifiable net assets had fair values that approximated their historical book values. In addition, the acquisition resulted in no goodwill or bargain purchase gain recognized in the consolidated financial statements of the investor company. Assuming that the investor company uses the equity method to account for its investment in the investee, what is the balance in the “investment in investee” account in the investor company’s pre- consolidation balance sheet on December 31, 2019?

$987,500

$450,000

$500,000

$600,000

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