Question #74
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 32
Status: Unattempted
Question
Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The value of the investment account on December 31, 2002, is:
Answer Choices:
A. $48,000
B. $60,000
C. $63,000
Explanation
Because company X exerts significant influence over company S, the investment will be
treated using the equity method, even though the ownership is less than the 20%
guideline. The value of the investment account is equal to the beginning balance plus the
proportionate income of company S minus the dividends received from company S, which
equals 48,000 + (0.15 x 100,000) − (0.15 x 20,000) = 60,000.