Question

On January 1, 2021, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $840,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2021, was $80,000. During 2021, Short also paid cash dividends in the amount of $24,000.
Required: Compute the amount that would be reported for the investment on American Corporation's financial statements at December 31, 2021. Investment amount $ 236,000

Answer 1

Answer:

"$224,000" is the correct solution.

Explanation:

The given values are:

Corporation purchased percentage,

= 25%

Original investment,

= $210,000

Short's net income,

= $80,000

Paid cash dividend,

= $24,000

Now,

The share of net income will be:

= $25 \ percent\times 80,000$

= $0.25\times 80000$

= $20,000$ ($)

The cash dividend will be:

= $25 \ percent\times 24,000$

= $0.25\times 24,000$

= $6,000$ ($)

hence,

On December 31, 2021, the balance will be:

= $Original \ investment+Net \ income \ share+Cash \ dividend$

= $210,000+20,000+6,000$

= $230,000-6,000$

= $224,000$ ($)