Sage, inc. bought 40% of adams corp.'s outstanding common stock on january 2, 1991, for $400,000. the carrying amount of adams' net assets at the purchase date totaled $900,000. fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. the plant has an 18-year life. all inventory was sold during 1991. during 1991, adams reported net income of $120,000 and paid a $20,000 cash dividend. what amount should sage report in its income statement from its investment in adams for the year ended december 31, 1991?

income statment

48,000 gain on adams investment

(6,000) amortization expense

42,000 net

Explanation:

900,000 x 40% = 360,000

plant       90,000 x 40% = 36,000

inventory 10,000 x 40% =   4,000

Total goodwill                    40,000

amortization of goodwill :

36,000/18 = 2,000

inventory     4,000

total             6,000

net income 120,000 x 40%     = 48,000

cash dividends 20,000 x 40% = 8,000

balance sheet:

360,000 + 48,000 - 8,000 = 400,000 Adams Investment

40,000 - 6,000  =                     34,000 Goodwill

net vlaue                                 434,000

income statment

48,000 gain on adams investment

(6,000) amortization expense

42,000 net

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