Question

On January 1, Year 1, Grade Company paid $300,000 for 20,000 shares of Medium Company's common stock, which represents a 15% investment in Medium. Grade does not have the ability to exercise significant influence over Medium. Medium declared and paid a dividend of $1 a share to its stockholders during Year 1. Medium reported net income of $260,000 for the year ended December 31, Year 1, and had a market value of $300,000 at December 31, Year 1. The balance in Grade's balance sheet account "Investment in Medium Company" at December 31, Year 1, should be
a) $280,000.

b) $300,000.

c) $319,000.

d) $339,000.

Answer 1

Answer:

B) $300,000.

Explanation:

Since Grade Company cannot exercise any real influence on Medium Company, it cannot value its investment using the equity method and must record its investment at fair market value. This means that the investment account must equal the market value of the 20,000 stocks, which in this case is $300,000. Grade Company should also record dividends received as revenue from investing activities.