Calculating Parent’s Annual Return on Investment: 75% Ownership Certain accounts of PBM Inc.

and its 75%-owned subsidiary, SOS Inc. (acquired in a purchase business combination in 2005), for the year ended 12/31/06 follow:

PBM SOS Sales Costs Net

.

and Income expenses

.

.

. $ 900,000

. (500,000)

. $ 400,000

$150,000 (70,000)

$ 80,000 Dividends Declared in 2006:

Investment Declared Declared in and and SOS paid paid Inc., on on balance 1/2/06 12/30/06 at

.

1/1/06

.

. . $ 325,000

$100,000 100,000 PBM uses the equity method but has not made any entries on its books in 2006 pertaining to the subsidiary’s 2006 earnings. SOS reported $20,000 of net income for each quarter of 2006. For 2006, amortization of cost in excess of book value has not yet been recorded in PBM’s general ledger; the unrecorded amount is $10,000. Thus PBM is using «07j-push-down accounting.

Calculate the annual return on PBM’s investment (AROI) in SOS for 2006.