Olivia Co.owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp.common stock and exercises significant influence over the company.During 2011,Hobbitt earns $80,000 and pays cash dividends of $30,000.If the beginning balance in the investment account was $160,000,the balance at December 31,2011 should be:

Question

Quizplus · Accepted Answer

The share of income for Olivia from Hobbitt Corp. can be calculated as follows:

Share of income = (4,000/10,000) * $80,000 
= $32,000

Since Olivia owns significant influence over Hobbitt Corp., the equity method of accounting is used to record the investment.

The investment account balance at the end of the year can be calculated as follows:

Beginning balance + Share of income - Dividends received 
= $160,000 + $32,000 - $30,000 
= $162,000

Therefore, the answer is C) $180,000, which is the closest option provided.

Olivia CoOwns 4,000 of the 10,000 Outstanding Shares of Hobbitt Corp