Use the following information for questions 108 and 109.
Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2015, Penn earns $300,000 and pays cash dividends of $100,000.
-If the beginning balance in the investment account was $600,000, the balance at December 31, 2015 should be

Question

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The equity method is used to account for investments in common stock when the investor has significant influence but does not control the investee. Under this method, the investor initially records the investment at cost and subsequently adjusts the investment account for its share of the investee's earnings or losses and dividends paid.

In this case, Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock, which gives it significant influence over the investee. Therefore, the equity method should be used to account for the investment.

The initial investment was recorded at $600,000. During 2015, Penn earns $300,000. Since Tracy Company owns 40% (4,000/10,000) of Penn's outstanding shares, Tracy Company's share of Penn's earnings is $120,000 (40% x $300,000). Tracy Company's investment account should be increased by this amount, bringing the balance to $720,000 ($600,000 + $120,000).

In addition, Penn pays $100,000 in cash dividends during 2015. Since Tracy Company owns 40% of Penn's outstanding shares, Tracy Company's share of the dividends is $40,000 (40% x $100,000). Tracy Company's investment account should be decreased by this amount, bringing the balance to $680,000 ($720,000 - $40,000).

Use the Following Information for Questions 108 and 109