At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Through this investment and by having two seats on their Board of Directors, Manowar has signi?cant in?uence over Cortez. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?
A) $152,000
B) $150,150
C) $150,000
D) $172,500

Question

Quizplus · Accepted Answer

Manowar Ltd. uses the equity method to account for its investment in Cortez Co. Under the equity method, Manowar Ltd. records its share of Cortez Co.'s net income and dividends as adjustments to its investment account.In 20X1, Manowar Ltd.'s share of Cortez Co.'s net income is $14,000 (20% x $70,000). Manowar Ltd. also receives $8,000 in dividends from Cortez Co. (20% x $40,000). Therefore, Manowar Ltd.'s investment in Cortez Co. increases by $22,000 ($14,000 + $8,000) to $172,000 ($150,000 + $22,000).In 20X2, Manowar Ltd.'s share of Cortez Co.'s net income is $16,000 (20% x $80,000). Manowar Ltd. also receives $20,000 in dividends from Cortez Co. (20% x $100,000). Therefore, Manowar Ltd.'s investment in Cortez Co. decreases by $4,000 ($16,000 - $20,000) to $168,000 ($172,000 - $4,000).

At the Beginning of 20X1, Manowar Ltd