In January 2008, 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’ balance sheet and had a remaining 10-year useful life.
For the year ended December 31, 2008 Otis reported net income of \($90,000\) and paid cash dividends of \($20,000\) on its common stock.
Required:
1. How much would Harold Corporation’s income increase in 2008 as a result of its investment in Otis?
2. What is the carrying value of Harold’s investment in Otis Company at December 31, 2008?