A company (the investor) purchased 860 shares of the investee’s common stock for $107,000 on January...

A company (the investor) purchased 860 shares of the investee’s common stock for $107,000 on January 2, 2021. The investee had 2,000 outstanding shares. During 2021, the investee declared dividends of $56,000 and reported earnings for the year of $452,000. If the investor company uses the equity method of accounting for its investment in the investee, its Investment in the investee account at December 31, 2021 should be

Expert Solution

Total shares of Investee Company = 2,000
Number of shares acquired of Investee Company = 860
Hence, percentage of shares acquired of Investee Company = 860/2000
= 43%
Cost of 43% common stock acquired of Investee Company = Number of shares bought x Price per share
= $107,000
Revenue from investment in Investee Company = Net income of Investee Company x Percentage of common stock acquired
= 452,000 x 43%
= $194,360
Share of dividend from Investee Company = Dividend paid by Investee Company x Percentage of common stock acquired
= 56,000 x 43%
= $24,080
Balance in investment at December 31, 2021 = Cost of 43% common stock acquired of Investee Company + Revenue from investment in Investee Company - Share of dividend from Investee Company
=107,000+194,360-24,080
= $277,280

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ekkarill92 answered 2 years ago

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