Question

Pacer Company purchased 300 of the 1,000 outstanding shares of Queen Company’s common stock for $80,000 on January 2, 2012. During 2013, Queen Company declared dividends of $8,000 and reported earnings for the year of $20,000. If Pacer Company uses the equity method of accounting for its investment in Queen Company, its Investment in the Queen Company account on December 31, 2013, should be?

Answer 1

Answer:

Pacer Company will show investment in Queen Company as on December 31, 2013 = $77,600

Explanation:

Here, 300 out of 1,000 shares means 30% and where equity method is used, then if any dividend is received then that value is deducted from cost of investment, and any kind of earnings received is added to net income.

Here dividend received = $8,000 $\times$ 30% = $2,400

this will be deducted from cost = $80,000 - $2,400 = $77,600

Now, profit share of $20,000 $\times$ 30% = $6,000 will be added in income of Pacer Company, as part of their income, but will lay no impact on cost of investment.

Therefore,

Pacer Company will show investment in Queen Company as on December 31, 2013 = $77,600