If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what will the balance in the Investment in Stamp Company be at December 31, 2016?

Question

Quizplus · Accepted Answer

The equity method of accounting means that Posthorn Corporation will record its share of Stamp Company's net income (or loss) as an increase (or decrease) in the Investment in Stamp Company account. Additionally, any dividends received from Stamp Company will also be recorded as a reduction in the Investment in Stamp Company account.
Given that Posthorn Corporation owns 40% of Stamp Company, we can calculate its share of net income as follows:
Net income of Stamp Company * 40% = Posthorn Corporation's share of net income
Using the data provided in the question stem, we can calculate Posthorn Corporation's Investment in Stamp Company as follows:
Beginning balance: $200,000
Add Posthorn Corporation's share of net income for the year:
$600,000 * 40% = $240,000
Ending balance before dividends: $440,000
Subtract dividends received:
$440,000 - $32,000 = $408,000
Therefore, the balance in the Investment in Stamp Company account at December 31, 2016, using the equity method, would be $408,000, which corresponds to choice B.

If Posthorn Corporation Accounts for Its Investment in Stamp Company