Blithe Company purchased 60 percent of Spirit Company's stock for $100,000 on January 1, 2006 when Spirit reported $120,000 of common stock outstanding and retained earnings of $25,000. On December 31, 2008, Blithe reported its investment in Spirit at $126,100 using equity-method accounting for its investment. Blithe received dividends from Spirit totaling $15,000 over the three-year period. The purchase differential is amortized over 10 years.
Determine the amount of net income reported by Spirit over the three-year period.
Net book value of Spirit as on Jan 1, 2006 = 120000+25000=145000
Net book value of purchase (60%) = 145000*60%=$87000
Purchase differential = $100000-87000=1300
Life of amortization for purchase ...
The solution examines Blithe Company purchased by a 60% Spirit Company.