On January 1, 2014, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 2014, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 2014, the shares had a market value of $160,000. What investment balance will be reported on Turtle's December 31, 2014 statement of financial position?

Question

Quizplus · Accepted Answer

Under the equity method, the initial investment is recorded at cost and adjusted for the investor's share of the investee's earnings/losses and dividends.

Initial investment:
30% of outstanding shares = 30% x MV = 30% x $500,000 = $150,000

2014 adjustments:
Turtle's share of Shell's net earnings = 30% x $40,000 = $12,000
Turtle's share of Shell's dividends = 30% x $5,000 = $1,500

Investment balance at December 31, 2014:
Cost + share of net earnings - share of dividends + share of unrealized gain (MV - Cost)
= $150,000 + $12,000 - $1,500 + (30% x ($160,000 - $150,000))
= $160,500

Therefore, the investment balance reported on Turtle's December 31, 2014 statement of financial position is $160,500 (Option B).