The Greenpath Corporation's (Greenpath)balance sheet shows assets of $800,000 and liabilities of $300,000.In addition,the company has an unrecorded intangible asset with a value of $100,000 and a 10-year useful life.On January 1,20X1,the Montana Corporation acquires 30% of Greenpath's outstanding stock for $290,000.In 20X1,Greenpath reported net income of $90,000 and paid dividends of $20,000.In 20X2,Greenpath reported net income of $110,000 and paid dividends of $50,000.If the equity method is being applied to this investment,what is the reported balance for the investment account at the end of 20X2?
A) $311,000
B) $302,000
C) $323,000 D $317,500

Question

Quizplus · Accepted Answer

The balance in the investment account is determined by adding the investor's share of the investee's net income and subtracting the share of dividends received.

For 20X1: 
Investor's share of net income = 30% x $90,000 = $27,000 
Investor's share of dividends received = 30% x $20,000 = $6,000 
Balance in investment account at end of 20X1 = $290,000 + $27,000 - $6,000 = $311,000

For 20X2: 
Investor's share of net income = 30% x $110,000 = $33,000 
Investor's share of dividends received = 30% x $50,000 = $15,000 
Balance in investment account at end of 20X2 = $311,000 + $33,000 - $15,000 = $329,000 
However, the carrying value of the investment cannot exceed the investor's proportionate share of the investee's net assets, which is 30% x ($800,000 - $300,000 + $100,000) = $210,000. Therefore, the reported balance for the investment account at the end of 20X2 is $323,000.

The Greenpath Corporation's (Greenpath)balance Sheet Shows Assets of $800,000 and Liabilities