Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2016. Suburbia reported net income in 2016 of $90,000 and in 2017 of $120,000 earned evenly throughout the respective years. Prime received $24,000 dividends from Suburbia in 2016 and $36,000 in 2017. Prime uses the equity method to record its investment. The balance of Prime's Investment in Suburbia account at December 31, 2017 is:

Question

Quizplus · Accepted Answer

Under the equity method, the investment account is adjusted for the investor's share of the investee's net income and dividends received. Prime's share of Suburbia's net income is 70%. For 2016, it's 70% of $90,000 = $63,000, and for 2017, it's 70% of $120,000 = $84,000. Dividends received reduce the investment account. The initial investment was $210,000. Adjusting for 2016: $210,000 + $63,000 - $24,000 = $249,000. Adjusting for 2017: $249,000 + $84,000 - $36,000 = $297,000.

Prime Industries Acquired a 70 Percent Interest in Suburbia Company