Exercise 2

On January 2, 2010, Slurg Corporation paid $600,000 to acquire 20% interest in Padwaddy Inc. At that time, the book value of Padwaddy's stockholders' equity included $700,000 of common stock and $1,800,000 of retained earnings. All the excess purchase cost over the book value acquired was attributable to a patent with an estimated life of 10 years. Padwaddy paid $6,250 of dividends each quarter for the next two years, and reported net income of $180,000 for 2010 and $220,000 for 2011. Slurg recorded all activities related to their investment using the equity method.

Required:

1.Calculate Slurg's income from Padwaddy for 2010.

2.Calculate Slurg's income from Padwaddy for 2011.

3.Determine the balance of Slurg's Investment in Padwaddy account on December 31, 2011.