ExpertHard1 markMultiple Choice
CPA · Question 14 · Area II: Balance Sheet Accounts
Sterling Corp. owns a 30% interest in Alliance Co. and accounts for this investment using the equity method. During Year 1:<br/>- Alliance reported net income of $200,000<br/>- Alliance declared and paid dividends of $80,000<br/>- Sterling's original investment cost was $500,000<br/><br/>What is the carrying amount of Sterling's investment in Alliance at the end of Year 1?
Sterling Corp. owns a 30% interest in Alliance Co. and accounts for this investment using the equity method. During Year 1:<br/>- Alliance reported net income of $200,000<br/>- Alliance declared and paid dividends of $80,000<br/>- Sterling's original investment cost was $500,000<br/><br/>What is the carrying amount of Sterling's investment in Alliance at the end of Year 1?
Answer options:
A.
$500,000
B.
$536,000
C.
$560,000
D.
$576,000
How to approach this question
Under equity method: start with original investment cost, add proportionate share of investee's income, subtract proportionate share of dividends received. The investor's percentage ownership determines the proportionate share.
Full Answer
B.$536,000✓ Correct
$536,000
Under ASC 323, the equity method requires the investor to adjust the investment account for its proportionate share of the investee's income (increase) and dividends (decrease). This reflects the investor's share of the investee's net assets.
Common mistakes
Not adjusting for income or dividends, adding dividends instead of subtracting them, or using wrong ownership percentage
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