Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 2014, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 2014. How much income should Heartfelt report during 2014 from the Candle investment?

Question

Quizplus · Accepted Answer

Heartfelt owns 40%, therefore, their share of net earnings is $100,000 x 40% = $40,000. Since Candle declared and paid $10,000 in dividends, Heartfelt receives $10,000 x 40% = $4,000. The carrying value of the investment increases by $36,000 ($40,000 income - $4,000 dividend), bringing the carrying value to $500,000 + $36,000 = $536,000. Therefore, Heartfelt should report $40,000 of income from the Candle investment.

Heartfelt Company Owns a 40% Interest in the Voting Common