_____ Paxel owns 80% of Saxel's outstanding common stock. For 2006, Saxel reported $60,000 of net income and declared dividends of $10,000. What is the carrying value of Paxel's investment using the equity method at 12/31/06 if the investment's carrying value on 1/1/06 was $200,000?
A) $200,000
B) $208,000
C) $240,000
D) $248,000
E) $256,000

Question

Quizplus · Accepted Answer

The carrying value of Paxel's investment in Saxel using the equity method at the end of 2006 is calculated by starting with the initial carrying value at the beginning of the year, adding Paxel's share of Saxel's net income, and subtracting dividends received by Paxel. Paxel owns 80% of Saxel, so Paxel's share of Saxel's net income is 80% of $60,000, which is $48,000. Paxel's share of the dividends is 80% of $10,000, which is $8,000. Therefore, the carrying value at the end of 2006 is $200,000 + $48,000 - $8,000 = $240,000. However, the correct calculation should include the initial investment value plus the proportionate share of net income, without subtracting the dividends received, because the equity method adjusts the investment account for the investor's share of the investee's earnings and dividends are considered a distribution of those earnings. Thus, the correct calculation is $200,000 + $48,000 = $248,000.

_____ Paxel Owns 80% of Saxel's Outstanding Common Stock