Question

On January 1, Year 1, Johnston Company purchased a 40% interest in the common stock of Truly Inc. for $100,000. Johnston has significant influence but not control. On December 10, Year 1, Truly declared and paid dividends of $20,000. Truly reported net income of $50,000 for Year 1.
What is the book value of Johnston’s investment in Truly at the end of Year 1?

Answer 1

Answer:

$112,000

Explanation:

The Equity method shall be used in this question for determining book value of investment made by the Johnston company in Truly Inc because the investment gives the Johnston company the significant influence over the Truly Inc.

Under equity method, the book value of investment made by the Johnston company as at end of year 1 shall be determined as follow:

Amount invested initially                                 $100,000

Add: Net income for the year                          $20,000

(50,000*40%)

Less: dividends received                                 ($8,000)

(20,000*40%)    

Book value of investment at end of year 1      $112,000