On January 3, 2019, Sheppard Corporation purchased 25% of Meredith Corporation's common stock for $65,000. The net asset's book value is equal to the fair market value. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $72,000; in 2020, it increased again to $80,000. What would be the balance in the investment account as of December 31, 2019?

Question

Quizplus · Accepted Answer

Sheppard Corporation should use the equity method since it owns 25% of Meredith Corporation. The investment account is adjusted for Sheppard's share of Meredith's net income. For 2019, Sheppard's share of Meredith's net income is 25% of $18,000, which is $4,500. Therefore, the balance in the investment account as of December 31, 2019, is $65,000 (initial investment) + $4,500 (share of net income) = $69,500.

On January 3, 2019, Sheppard Corporation Purchased 25% of Meredith