Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its significant influence investment in Stamp Company using the equity method, what will the balance in the Investment in Stamp Company be at December 31, 2019?

Question

Quizplus · Accepted Answer

Under the equity method, the investment account is initially recorded at cost and is adjusted each period for the investor's share of the investee's net income or loss and dividends declared.

Investment in Stamp Company at January 1, 2019: $200,000
Posthorn Corporation's share of Stamp Company's net income: ($120,000 × 20%) = $24,000 
Posthorn Corporation's share of Stamp Company's dividends: ($80,000 × 20%) = ($16,000)
Adjustment to investment account: $24,000 - $16,000 = $8,000

Investment in Stamp Company at December 31, 2019: $200,000 + $8,000 = $208,000.

Note that the market value of shares at the end of the period is not relevant to the calculation of the investment account using the equity method.

Posthorn Corporation Acquired 20,000 of the 100,000 Outstanding Common Shares