On January 2, Groneman Corporation acquired 30% of the outstanding common stock of Coulson Company for $550,000. For the year ended December 31, Coulson reported net income of $90,000 and paid cash dividends of $30,000 on its common stock. At December 31, the carrying value of Groneman's investment in Coulson under the equity method is

Question

Quizplus · Accepted Answer

Under the equity method, the initial investment is recorded at cost and adjusted for the investor's share of the investee's net income or loss and dividends paid.

Groneman's initial investment in Coulson was $550,000. Since Groneman acquired 30% of the outstanding common stock of Coulson, it has significant influence over Coulson and should use the equity method to account for its investment.

The investor's share of net income is calculated as follows: 
Investor's share of net income = Percentage of ownership × Coulson's net income 
Investor's share of net income = 30% × $90,000 = $27,000

The carrying value of the investment at December 31 is calculated as follows: 
Carrying value = Cost + Investor's share of net income - Dividends received 
Carrying value = $550,000 + $27,000 - $30,000 = $547,000

Therefore, the correct choice is D) $568,000, which is the carrying value of Groneman's investment in Coulson under the equity method at December 31.

On January 2, Groneman Corporation Acquired 30% of the Outstanding