ExpertMedium1 markMultiple Choice
CPA · Question 26 · Area II: Balance Sheet Accounts
On January 1, Year 1, Investor Co. purchased 30% of Investee Inc. for $600,000, giving it significant influence. <br/>For Year 1, Investee reported Net Income of $100,000 and paid dividends of $20,000. <br/>At year-end, the fair value of the investment was $650,000. <br/>What is the carrying amount of the investment on Investor's balance sheet at December 31, Year 1?
On January 1, Year 1, Investor Co. purchased 30% of Investee Inc. for $600,000, giving it significant influence. <br/>For Year 1, Investee reported Net Income of $100,000 and paid dividends of $20,000. <br/>At year-end, the fair value of the investment was $650,000. <br/>What is the carrying amount of the investment on Investor's balance sheet at December 31, Year 1?
Answer options:
A.
$600,000
B.
$624,000
C.
$630,000
D.
$650,000
How to approach this question
Significant Influence (20-50%) -> Equity Method. <br/>Balance = Cost + %NI - %Dividends. <br/>Ignore Fair Value (unless FVO elected, but standard is Equity Method).
Full Answer
B.$624,000✓ Correct
B
Under the Equity Method:<br/>Beginning Balance: $600,000<br/>Add: Share of Net Income ($100,000 × 30%): +$30,000<br/>Less: Share of Dividends ($20,000 × 30%): -$6,000<br/>Ending Balance: $624,000.<br/>Fair value is ignored unless the Fair Value Option was elected (not stated).
Common mistakes
Using Fair Value. Treating dividends as income (that's the Fair Value method/Cost method).
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