Ace purchases 40 percent of Basket! Company on January 1 for $500,000.

Ace purchases 40 percent of Basket! Company on January 1 for $500,000. Although Ace did notuse it, this acquisition gave Ace the ability to apply significant influence to Baskett’s operating andfinancing policies. Baskett reports assets on that date of $1,400,000 with liabilities of $500,000.One building with a seven-year life is undervalued on Baskett’s books by $140,000. Also, Baskett’sbook value for its trademark (10-year life) is undervalued by $210,000. During the year, Baskett re¬ports net income of $90,000 while paying dividends of $30,000. What is the Investment in BaskettCompany balance (equity method) in Ace’s financial records as of December 31 ?

AnswerBalance on 1st January= $500,000Share of Net Income (90000*40%) =$36,000Share of dividend (30000*40%)= $12,000Balance on 31st December = $500,000 +$36,000 -$16,400 -$12,000=$507,600