On January 1 2007,Wheeley Company issued common shares with a par value of $20,000 and a market value of $172,000 in exchange for 40 percent ownership of Twain Company.Balance sheet information reported by Twain on that date is given below:
Twain reported net income of $56,000 and paid dividends of $25,000 during the year.Wheeley uses the equity method of accounting.The estimated economic life of the patents held by Twain is 8 years.The buildings and equipment are expected to last 6 more years on average with zero salvage value.

-Based on the information provided,what amount of income will be reported by Wheeley from its investment in Twain for the year 2007?
A)$22,400
B)$11,800
C)$4,800
D)$12,400

Question

On January 1 2007,Wheeley Company issued common shares with a par value of $20,000 and a market value of $172,000 in exchange for 40 percent ownership of Twain Company.Balance sheet information reported by Twain on that date is given below:
Twain reported net income of $56,000 and paid dividends of $25,000 during the year.Wheeley uses the equity method of accounting.The estimated economic life of the patents held by Twain is 8 years.The buildings and equipment are expected to last 6 more years on average with zero salvage value.
 
-Based on the information provided,what amount of income will be reported by Wheeley from its investment in Twain for the year 2007?
A)$22,400 
B)$11,800 
C)$4,800 
D)$12,400

Quizplus · Accepted Answer

Wheeley Company owns 40% of Twain Company, and because of this, it is required to use the equity method of accounting. Under the equity method, the investor records its share of the investee's income or loss in its income statement.

Twain reported Net Income of $56,000, and Wheeley owns 40% (0.4) of this. Thus, Wheeley's share of net income is $22,400 ($56,000 x 0.4).

However, Twain paid dividends of $25,000 during the year, and since Wheeley owns 40%, it received $10,000 in dividends (25,000 x 0.4).

So, Wheeley's total income from Twain for the year 2007 is $22,400 - $10,000 = $12,400.

Therefore, the answer is B.

On January 1 2007,Wheeley Company Issued Common Shares with a Par