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On January 1, 2005, Gardner Associates purchased 30 percent of the outstanding shares of stock of Gillen Corp. for $150,000 cash. The investment will be accounted for by the equity method. On that date, Gillen's net assets (book and fair value) were $300,000. Gardner has determined that the excess of the cost of its investment in Gillen over its share of Gillen's net assets is attributable to equipment whose market value exceeds its carrying value by $100,000 and to an operating license whose market value exceeds its canying value by $100,000. The remaining useful life of the equipment is ten years and the I'P.n1aining useful life of the operating license is 20 years.

Gillen's net income for the year ended December 31,2005, was $60,000. During 2005, Gardner received $5,000 cash dividends from Gillen. There were no other transactions between the two companies.

Compute the amount that would be reported on Gardner Associates' books for the investment in Gillen Corp. at December 31, 2005.

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Solution Preview

The amount invested is 150,000.

On book value of 300,000, 30% of investment comes to 90,000. The excess investment is 60,000. This is attributable to equipment and license and since each of them is excess by ...

Solution Summary

The solution explains how to calculate the ending balance in the investments account.