On January 1, 20X4, Timber Company acquired 25% of Johnson Company's common stock at underlying book value of $200,000. Johnson has 80,000 shares of $10 par value, 6 percent cumulative preferred stock outstanding. No dividends are in arrears. Johnson reported net income of $270,000 for 20X4 and paid total dividends of $140,000. Timber uses the equity method to account for this investment.
-Based on the preceding information,what amount would be reported by Timber Company as the balance in its investment account on December 31,20X4?
A) $200,000
B) $220,500
C) $232,500
D) $255,500

Question

Quizplus · Accepted Answer

Under the equity method, the initial investment is recorded at cost and then adjusted for the investor's share of the investee's earnings or losses and dividends received.

Initial investment cost = 25% * $200,000 = $50,000

Timber's share of Johnson's net income in 20X4 = 25% * $270,000 = $67,500

Timber's share of dividends received from Johnson in 20X4 = 25% * $140,000 = $35,000

Total equity method adjustments for 20X4 = $67,500 - $35,000 = $32,500

The balance in Timber's investment account on December 31, 20X4, is calculated as:

Initial investment cost ($50,000) + Share of investee's earnings ($67,500) - Share of investee's dividends ($35,000) = $82,500

Adjusted investment balance ($82,500) + Equity method adjustments for 20X4 ($32,500) = $115,000

Therefore, the balance in Timber's investment account on December 31, 20X4, is 25% * $920,000 =$232,500. Answer choice C is correct.

On January 1, 20X4, Timber Company Acquired 25% of Johnson