On January 2,20X5,Park Co.purchased 10 percent of Sky,Inc.'s outstanding common shares for $400,000.Park is the largest single shareholder in Sky,and Park's officers are a majority on Sky's board of directors.As a result,Park is able to exercise significant influence over Sky.Sky reported net income of $500,000 for 20X5,and paid dividends of $150,000.In its December 31,20X5,balance sheet,what amount should Park report as investment in Sky?
A)$385,000
B)$450,000
C)$400,000
D)$435,000

Question

Quizplus · Accepted Answer

Park should use the equity method to account for its investment in Sky because it can exercise significant influence over Sky. The investment is initially recorded at cost ($400,000). Park's share of Sky's net income ($500,000 * 10% = $50,000) increases the investment, and dividends received ($150,000 * 10% = $15,000) decrease the investment. Therefore, the investment amount at year-end is $400,000 + $50,000 - $15,000 = $435,000.