Question

Fizzy Cola acquired 45% of the voting stock of National Bottlers on January 1, 2017, at a cost of $55,000,000, an amount equal to 45% of National's book value. Fizzy reports its investment using the equity method. In 2017, National reported net income of $9,000,000 and declared and paid dividends of $4,000,000. National sells product to Fizzy at a markup of 25% on cost. Fizzy had $6,000,000 of product purchased from National in its ending inventory, measured at cost to Fizzy. What is Fizzy's Investment in National balance reported on its December 31, 2017 balance sheet

Answer 1

Answer: $54,510,000‬

Explanation:

The Investment at year end 2017 is;

= Opening Investment + Portion of Net Income - Unconfirmed profit on ending inventory - Dividends

Portion of Net Income

= 45% * 9,000,000

= $4,050,000

Unconfirmed profit on ending inventory

= (6,000,000 - ( 6,000,000/125%)) * 45%

=  $540,000

Investment account at end of year = 55,000,000 + 4,050,000 - 540,000 - 4,000,000

= $54,510,000‬