On January 2, 2017, Hull Corp.purchased 200 of the 1,000 outstanding common shares of Gatineau Ltd.for $120,000.During 2017, Gatineau declared total cash dividends of $20,000 and reported net income for the year of $80,000.If Hull uses the equity method of accounting for its investment in Gatineau, Hull's Investment in Gatineau Ltd.account at December 31, 2017 should be

Question

Quizplus · Accepted Answer

Using the equity method, the investment account is initially recorded at cost and then adjusted annually for the investor's proportionate share of the investee's net income or loss and dividends. Hull Corp.'s share of Gatineau's net income is:

200/1,000 × $80,000 = $16,000

Hull Corp.'s share of Gatineau's dividends is:

200/1,000 × $20,000 = $4,000

Therefore, the balance in Hull's investment account at December 31, 2017 is:

$120,000 + $16,000 - $4,000 = $132,000