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dlinn [17]
3 years ago
15

TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $500,000. This acquisition gives TunaCo the ability t

o apply significant influence to Stanley's operating and financing policies and TunaCo elects to use the equity method of accounting. Stanley reports assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life has a book value of $100,000 and a fair market value of $400,000. During the current year, Stanley, Inc. reports net income of $140,000, while paying out dividends of $70,000 for the year. What is the Investment in Stanley account balance in TunaCo's accounting records at the end of the current year?
Business
1 answer:
Sidana [21]3 years ago
5 0

Answer:

$512,500

Explanation:

Data provided in the question:

Percentage of Stanley, Inc purchased by TunaCo = 25%

Amount for which the TunaCo purchased = $500,000

Assets on Stanley = $160,000

Liabilities of Stanley = $400,000

Useful life of building = 15 years

Book value of the building = $100,000

Fair market value = $400,000

Net income reported  by Stanley = $140,000

Dividend paid = $70,000

Now,

Annual depreciation = [Fair value - Book value] ÷ Useful life

= [ $400,000 - $100,000] ÷ 15

= 20,000

Now,

Total account balance of Stanley = Net income reported  by Stanley - Annual depreciation - Dividend paid

= $140,000 - $20,000 - $70,000

= $50,000

Account balance of TunaCo = Initial investment + 25% of account balance of Stanley

= $500,000 + [ 25% of $50,000]

= $500,000 + $12,500

= $512,500

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