Exhibit 15-1 On January 1, 2010, Circle Corporation paid $900, 000 for 80, 000 shares of Birch Company's common stock, which represents 40% of Birch's outstanding common stock.Birch reported income of $300, 000 and paid a cash dividend of $100, 000 during 2010.
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Refer to Exhibit 15-1.Circle should report the investment in Birch Company on its December 31, 2010, balance sheet at

Question

Quizplus · Accepted Answer

Circle Corporation should use the equity method to account for its investment in Birch Company because it owns 40% of Birch's common stock, which typically provides significant influence over the investee. Under the equity method, Circle would initially record the investment at cost ($900,000) and subsequently adjust the carrying amount of the investment to recognize its share of Birch's earnings and dividends. Birch reported income of $300,000 for the year. Circle's 40% share of Birch's income is $120,000 ($300,000 * 40%). Circle would increase the carrying amount of its investment by this amount. Birch paid dividends of $100,000, of which Circle's 40% share is $40,000. Circle would decrease the carrying amount of its investment by this amount. Therefore, the investment would be reported at $980,000 ($900,000 + $120,000 - $40,000) on Circle's December 31, 2010, balance sheet.

Exhibit 15-1 on January 1, 2010, Circle Corporation Paid $900