The following information applies to Questions 39-40
On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8.
-Based on the preceding information,what balance will Ramon report as its investment in Tester at December 31,20X8,assuming Ramon uses the equity method in accounting for its investment?
A) $318,750
B) $317,500
C) $330,000
D) $326,250

Question

Quizplus · Accepted Answer

The correct answer is A.The equity method requires that the investment account be adjusted each period to reflect the share of the investor's net income or loss. In this case, Ramon's share of Tester's net income for 20X8 is $30,000 (75% x $40,000). This amount is added to the beginning balance of the investment account ($300,000) and reduced by the share of dividends received ($7,500) to arrive at the ending balance of $318,750.

The Following Information Applies to Questions 39-40