Rye Company purchased 25% of Lena Company's common stock during 2019 for $150,000.The Investment in Lena had a $160,000 fair value at the end of 2019 and a $140,000 fair value at the end of 2020.
-Lena Company reported net income of $60,000 in 2019 and $72,000 in 2020 and declared and paid dividends of $30,000 each year.On Rye Company's balance sheet at December 31,2020,what amount was reported for the investment in Lena Company?

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Quizplus · Accepted Answer

The correct answer is A.The investment in Lena Company is accounted for using the equity method. Under the equity method, Rye Company records its share of Lena Company's net income and dividends as income and dividends, respectively. The investment account is adjusted to reflect the change in fair value.At the end of 2019, Rye Company's share of Lena Company's net income is $15,000 (25% x $60,000). Rye Company also receives $7,500 in dividends (25% x $30,000). The investment account is increased by $22,500 ($15,000 + $7,500).At the end of 2020, Rye Company's share of Lena Company's net income is $18,000 (25% x $72,000). Rye Company also receives $7,500 in dividends (25% x $30,000). The investment account is decreased by $20,500 ($18,000 + $7,500).The investment in Lena Company is reported on Rye Company's balance sheet at December 31, 2020 at $168,000 ($150,000 + $22,500 - $20,500).

Rye Company Purchased 25% of Lena Company's Common Stock During