Question: Zen Company reports net income of $140,000 each year and pays an annual cash dividend of $50,000. The company holds net assets of $1,200,000 on January 1, 2001. On that date, Werry Co. purchases 40 percent of the outstanding stock for $600,000, which gives Werry the ability to significantly influence Zen. At the purchase date, goodwill was assigned a useful life of 20 years. On December 31, 2003, what is the Investment in Zen balance in Werry's financial records?
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Purchase Price of Zen Stock
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600,000
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Book Value of Zen Stock ($1,200,000 x 40%)
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-480,000
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Goodwill
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120,000
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Life of Goodwill
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20 years
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Annual Amortization (for 2001 only)
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6,000
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Cost of January 1, 2001
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600,000
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2001 Income Accrued ($140,000 x 40%)
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56,000
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2001 Amortization (above)
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-6,000
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2002 Dividend Collected ($50,000 x 40%)
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-20,000
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2002 Income Accrued ($140,000 x 40%)
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56,000
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2002 Amortization
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0
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2002 Dividend Collected ($50,000 x 40%)
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-20,000
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2003 Income Accrued ($140,000 x 40%)
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56,000
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2003 Amortization (above)
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0
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2003 Dividend Collected ($50,000 x 40%)
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-20,000
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Investment in Zen, 12/31/03
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702,000
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