On January 1, 2014, Panda Company purchased 25 % of Skill Company's common stock; no goodwill resulted from the acquisition.Panda Company appropriately carries the investment using the equity method of accounting and the balance in Panda's investment account was $190,000 on December 31, 2014.Skill reported net income of $120,000 for the year ended December 31, 2014 and paid dividends on its common stock totaling $48,000 during 2014.How much did Panda pay for its 25% interest in Skill?

Question

Quizplus · Accepted Answer

Panda's share of Skill's net income is 25% of $120,000, which is $30,000. Panda's share of dividends is 25% of $48,000, which is $12,000. The increase in the investment account is $30,000 (income) - $12,000 (dividends) = $18,000. Therefore, the initial investment was $190,000 - $18,000 = $172,000.

On January 1, 2014, Panda Company Purchased 25 % of Skill