Reference no: EM13333409

Problem

At the beginning of 20X3, Jong Ltd. acquired 80% of the outstanding shares of Nye Co. for $1,400,000. At the acquisition date, Nye's shareholders' equity consisted of the following:

Common shares    $350,000

Retained earnings    875,000

At the time of acquisition, all of Nye's net identifiable assets had carrying values that equalled their fair values with the exception of its patents. The fair value of the patents exceeded their carrying values by $525,000 and had a remaining life of 8 years.

The trial balances for Jong and Nye for December 31, 20X6 are as follows:

Jong Ltd.        Nye Co.

Additional information:

• 20X6 net income for Jong is  $770,000 and for Nye, $365,050.
• At the beginning of 20X6, Jong  purchased a piece of equipment from Nye for $350,000. At the time of purchase, the equipment  had a net book value of $280,000 to Nye and an estimated useful life of 5  years.
• At the end of 20X5, Jong's  inventory included $350,000 of goods purchased from Nye. Nye's had recorded a gross profit of  $140,000 on this sale.
• During 20X6, Nye sold goods to  Jong for $700,000. Nye earned a  gross profit of $280,000 on this sale.
• At the end of 20X6, Jong had  sold all the goods in its opening inventory to third parties but still had  $210,000 of the goods purchased from Nye during 20X6 in its ending  inventory. All of those goods will  be sold to third parties in 20X7.
• Amortization expense for the  plant, equipment, and patent are included in operating expenses.
• At the beginning of 20X4, Jong  issued bonds for $359,800. These  bonds have an interest rate of 8%, mature in 7 years, and have a face  value of $350,000. Interest will be  paid annually at the end of the year.  Nye purchased half of these bonds at the beginning of 20X6 for  $169,750. Any intercompany gains or  losses on these bonds are to be allocated between the two companies.
• Both companies have an average  income tax rate of 40%.

Required:

Assume that Jong used the equity method of accounting for its investment in Nye instead of the cost method. Calculate the balance of its "Investment in Nye" account.