In January 2014, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $700,000. This investment gave Domingo the ability to exercise significant influence over Martes. Martes’s assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2014, Martes reported net income of $170,000. In 2015, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years. What is the equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2015?a. $728,000.b. $748,000.c. $756,000.d. $776,000.

a. $728,000.

Explanation:

Step 1: Calculation of excess cost over book value to patent

Patent = Acquisition cost - Book value of acquired net assets

           = $700,000 - [$3,900,000 - $900,000) × 20%]

           = $700,000 - $600,000

           = $100,000

Annual amortization of the patent for 10 years = $100,000 ÷ 10 = $10,000

Step 2: Calculation of equity balance

The equity balance of Domingo is calculated as follows:

Equity balance = Acquisition price + 2014 accrual income share + 2015 Income share - 2014 patent amortization - 2015 patent amortization - 2014 share of dividend - 2015 share of dividend

Equity balance = $700,000 + ($170,000 × 20%) + ($210,000 × 20%) - $10,000 - $10,000 - ($70,000 × 20%) - ($70,000 × 20%)

Equity balance = $700,000 + $34,000 + $42,000 - $10,000 - $10,000 - $14,000 - $14,000

Equity balance =  $728,000  

Therefore, he equity method balance of Domingo’s Investment in Martes, Inc., at December 31, 2015 is equal to $728,000.

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