On January 1 2017 Grgante Corporation purchased 25% of the common stock outstanding of Sheat Corporation for $270000. During 2017 Long Corporation reported net income of $80000 and paid cash dividends of $40000. The balance of the Stock Investments-Long account on the books of Grgante Corporation at December 31 2017 is

Question

Quizplus · Accepted Answer

The initial investment cost was $270,000 for 25% of the common stock, which would give Grgante Corporation the ability to influence significant operating and financial decisions of Sheat Corporation. Therefore, this purchase would qualify for the equity method of accounting.

Under the equity method, Grgante Corporation would record its share of Sheat Corporation’s net income and dividends received as follows: 
- Share of net income: 25% x $80,000 = $20,000
- Share of dividends received: 25% x $40,000 = $10,000

Therefore, the balance of the Stock Investments-Long account at December 31, 2017 would be:
Initial investment cost + share of net income - share of dividends received = $270,000 + $20,000 - $10,000 = $280,000.

Thus, the correct answer is D.

On January 1 2017 Grgante Corporation Purchased 25% of the Common