Question

Columbus Company owns 25% of Zanesville Inc. and accounts for the investment using the equity method. During the year, Zanesville Inc. reports a net loss of $1,602,000 and pays total dividends of $73,800. Which of the following describes the change in Columbus’s investment in Zanesville during the year? Select one: A. The investment increases by $326,700. B. The investment decreases by $232,750. C. The investment decreases by $418,950. D. The investment decreases by $400,500. E. None of the above

Answer 1

Answer:

The correct option is C,the investment decreases by $418,950.

Explanation:

The equity method of accounting for stock investment requires that the investor should increase its investment value by the share of net income in a year and decrease same by the amount of cash dividends received from  the investee company.

However,the opposite would be the case of net loss recorded in the year under review(share of net loss would be deducted from investment value) as shown below:

Share of net loss ($1,602,000*25%)    ($400,500)

share of cash dividends($73,800*25%)($18,450)

total reduction in investment value       ($418,950 )