Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 9

Company R pays $170,000 for a 30% interest in Company E on January 1, 2011. Company E's total stockholders' equity on that date is $500,000. The excess price is attributed to equipment with a 5-year life. During 2011, Company E reports net income of $35,000 and pays total dividends of $10,000. Answer the following questions assuming the investment is recorded under the equity method:
a. What is Company R's investment income for 2011?
b. What is Company R's investment balance on December 31, 2011?
c. Explain, in words, the investment balance on December 31, 2011.