Question
On January 1, 2017, Portland Company acquired all of Salem Companys voting stock for $16,000,000 in cash. Some of Salems assets and liabilities at the
On January 1, 2017, Portland Company acquired all of Salem Company’s voting stock for $16,000,000 in cash. Some of Salem’s assets and liabilities at the date of purchase had fair values that differed from reported values, as follows:
Book value | Fair value | |
---|---|---|
Buildings and equipment, net (20 years, straight-line) | $11,000,000 | $ 3,000,000 |
Identifiable intangibles (5 years, straight-line) | 0 | 10,000,000 |
Salem’s total shareholders’ equity at January 1, 2017, was $4,000,000. It is now December 31, 2020 (four years later). Salem’s retained earnings reflect the accumulation of net income less dividends; there have been no other changes in its retained earnings. Salem does not report any other comprehensive income. Cumulative goodwill impairment to the beginning of 2020 is $2,000,000. Goodwill impairment for 2020 is $500,000. Portland uses the complete equity method to account for its investment. The December 31, 2020, trial balance for Salem appears below.
Salem Dr (Cr) | |
---|---|
Current assets | $2,500,000 |
Plant assets, net | 28,000,000 |
Liabilities | (10,000,000) |
Capital stock | (2,000,000) |
Retained earnings, January 1 | (16,000,000) |
Sales revenue | (14,000,000) |
Cost of goods sold | 8,000,000 |
Operating expenses | 3,500,000 |
$ 0 |
What is 2020 equity in net income of Salem, reported on Portland’s books using the complete equity method?
A. $ 400,000
B. $ 900,000
C. $1,200,000
D. $2,500,000
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