APB Opinion No. 18
notes on hand-out problem

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Purchase price of investment in S Company stock:	$100,800
Composition of purchase price:
Underlying book value: ($400,000 x 21%)	$84,000
Non-depreciable asset appreciation: ($250,000-$260,000= $10,000 x 21%)	$ 2,100
Depreciable asset appreciation: ($200,000-$220,000 = $20,000 x 21%)	$ 4,200
Balance-Goodwill	$ 10,500

• Depreciable asset appreciations will expire over some time in the future. Their balances must be amortized out of the Investment account, otherwise the investment account will be overstated.

	100 %	21%
Income-as reported by Company S	$30,000	$6,300
Depreciation on depreciable asset appreciations   ($20,000) divided by 10 yr life	(2,000)	(420)
Income-adjusted for current value	$28,000	$5,880

• Company S cannot deduct additional depreciation on the asset appreciations because these additional amounts were not paid for these assets.

 
• Company P has paid for 21% of these asset increases and therefor must record the amortization on them. Adjustments must be made on Company P's books to reduce the Investment in Company S stock and to reduce investment income. After adjustment, Investment income must be equal to $5,880, as reflected in the above table for 21% of the income.

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