Question

On January 2, abc co. purchased 10% of XYZ Co.’s outstanding common stock for $400,000, which equaled the carrying amount and fair value of 10% of XYZ’s net assets. ABC is the largest stockholder in XYZ and ABC has the majority of the seats on XYZ’s board of directors. XYZ reported net income of $500,000 for the current year and paid total cash dividends of $150,000. On its December 31 balance sheet, what amount should ABC report as its investment in XYZ?
A. $450,000.
B. $435,000.
C. $400,000.
D. $385,000.

Answer 1

Answer:

B. $435,000.

Explanation:

Sine ABC has significant influence over XYZ, it must use the equity method to record its investment.

January 2

Dr Investment in XYZ 400,000

    Cr Cash 400,000

Dividends

Dr Cash 15,000

    Cr Investment in XYZ 15,000

Net income

Dr Investment in XYZ 50,000

    Cr Investment revenue 50,000