Sage, Inc. bought 40% of Adams Corporation’s outstanding common stock on January 2, 2008 for \($400,000.\) The carrying amount of Adams’ net assets at the purchase date totaled \($900,000\).
Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded the carrying amounts by \($90,000\) and \($10,000,\) respectively. The plant has an 18-year life. All inventory was sold during 2008. During 2008, Adams reported \($120,000\) net income and paid a \($20,000\) cash dividend.
Required:
1. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31, 2008?
2. What is the December 31, 2008 balance in the Investment in Adams account?
3. Assume that on January 2, 2008 when Sage acquired a 40% interest in Adams, it elected to account for this investment at fair value. If the fair value of Sage’s investment in Adams is \($470,000\) on December 31, 2008, what amount should Sage report in its 2008 income statement for this investment under the fair value option?