Douglas Company purchased 40% of the outstanding shares of Outrigger Corporation on January 1 at a cost of $675,000. Outrigger Corporation reported net income of $87,000 and paid total dividends of $33,000 for the year. At the end of the year, the Outrigger shares had a current market value of $680,000. After all necessary adjusting entries are made for the year, the balance in Douglas Company's Long- Term Investment account will be:

Question

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Douglas Company will use the equity method to account for its investment in Outrigger Corporation. The initial investment is $675,000. Douglas will recognize 40% of Outrigger's net income, which is $34,800 (40% of $87,000), and will also reduce the investment by 40% of the dividends received, which is $13,200 (40% of $33,000). Therefore, the balance in the Long-Term Investment account will be $675,000 + $34,800 - $13,200 = $696,600.

Douglas Company Purchased 40% of the Outstanding Shares of Outrigger