On January 1, 2017, Scallop Corp.purchased 25% of Prawn Corp.'s common shares; no goodwill resulted from the purchase.Scallop correctly uses the equity method to account for this investment at equity.The Investment in Associate account related to the Scallop investment was reported on the December 31, 2017 balance sheet at $360,000.Prawn had reported net income of $225,000 for calendar 2017, and paid dividends totalling $90,000 during 2017.How much did Scallop pay for its 25% interest in Prawn?

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Quizplus · Accepted Answer

Scallop's share of Prawn's net income is 25% of $225,000, which is $56,250. Scallop's share of dividends is 25% of $90,000, which is $22,500. The investment account increased by $56,250 (income) and decreased by $22,500 (dividends), resulting in a net increase of $33,750. Therefore, the initial investment was $360,000 - $33,750 = $326,250.