On January 1, 2014, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 2014, Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 2014, the shares had a market value of
$150,000. At what amount should the Arnold investment be reported at on the December 31, 2014 statement of financial position?

Question

Quizplus · Accepted Answer

Under the equity method, the investment is initially recorded at cost and adjusted for the investor's share of the investee's net income and dividends received. Palmer's share of Arnold's net income is 40% of $30,000, which is $12,000. Dividends received are 40% of $10,000, which is $4,000. The investment is increased by the share of net income and decreased by the dividends received: $137,000 + $12,000 - $4,000 = $145,000. The market value is not considered under the equity method.