Question

On July 1, 2018, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,500,000 for 2018, and paid $180,000 of dividends each quarter to its shareholders. After all closing entries are made, Tremen's "Investment in Delany Company" account would have a balance of: Multiple Choice $3,300,000. $3,600,000. $3,528,000. $3,156,000.

Answer 1

Answer:

Net income from July 1 to 31 December 2018       750,000

Less; Dividend paid ($180,000 x 2)                        360,000

Net income after dividend                                       390,000

Tremen's share of net income = 40% x $390,000 = $156,000

Tremen's Total investment = $3,000,000 + $156,000 = $3,156,000

The correct answer is D

Explanation:

In this regard, we will determine the net income for 6 months (July 1 to December 31), which is $1,500,000 divided by 2. Then, we will derive the dividend paid for the remaining 2 quarters of the year, which is $180,000 multiplied by 2. We will deduct the dividend paid for the remaining two quarters from the net income for 6 months. Thereafter, we will multiply the net income after dividend by 40%, which is Tremen's stake in the company. Finally, we will add Tremen's share of net income to his initial investment of $3,000,000.