On January 1, 2015, Reston Company purchased 25% of Ace Corporation's common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston's investment account was $1,120,000 at December 31, 2015. Ace reported net income of $700,000 for the year ended December 31, 2015, and paid common stock dividends totaling $280,000 during 2015. How much did Reston pay for its 25% interest in Ace?

Question

Quizplus · Accepted Answer

Reston's share of Ace's net income for 2015 would be 25% of $700,000, which is $175,000. Reston's share of the dividends paid by Ace would be 25% of $280,000, which is $70,000. The equity method records the investor's share of the investee's income as an increase to the investment account and records dividends received as a decrease to the investment account. Therefore, the investment account increased by $175,000 and decreased by $70,000 during 2015, for a net increase of $105,000. Since the investment account balance was $1,120,000 at the end of 2015, the initial investment must have been $1,120,000 - $105,000 = $1,015,000.

On January 1, 2015, Reston Company Purchased 25% of Ace