Asked by Rachael Oreilly on Jun 25, 2024
Verified
Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the equity method, what will the balance in the Investment in Stamp Company be at December 31, 2019?
A) $200,000
B) $208,000
C) $220,000
D) $240,000
Significant Influence
The power to participate in the financial and operating policy decisions of a business, without controlling it.
Common Shares
Equity investments that represent ownership in a company, giving holders voting rights and a share in the company's profits through dividends.
- Understand thoroughly and apply the equity method in the context of accounting for investments in associates.
- Calculate the book value of an investment following the equity method.
Verified Answer
AA
Arlyn Arredondo-PedrozaJun 29, 2024
Final Answer :
B
Explanation :
Under the equity method, the investment account is initially recorded at cost and is adjusted each period for the investor's share of the investee's net income or loss and dividends declared.
Investment in Stamp Company at January 1, 2019: $200,000
Posthorn Corporation's share of Stamp Company's net income: ($120,000 × 20%) = $24,000
Posthorn Corporation's share of Stamp Company's dividends: ($80,000 × 20%) = ($16,000)
Adjustment to investment account: $24,000 - $16,000 = $8,000
Investment in Stamp Company at December 31, 2019: $200,000 + $8,000 = $208,000.
Note that the market value of shares at the end of the period is not relevant to the calculation of the investment account using the equity method.
Investment in Stamp Company at January 1, 2019: $200,000
Posthorn Corporation's share of Stamp Company's net income: ($120,000 × 20%) = $24,000
Posthorn Corporation's share of Stamp Company's dividends: ($80,000 × 20%) = ($16,000)
Adjustment to investment account: $24,000 - $16,000 = $8,000
Investment in Stamp Company at December 31, 2019: $200,000 + $8,000 = $208,000.
Note that the market value of shares at the end of the period is not relevant to the calculation of the investment account using the equity method.
Learning Objectives
- Understand thoroughly and apply the equity method in the context of accounting for investments in associates.
- Calculate the book value of an investment following the equity method.