Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the
A) investment only
B) investment plus Wendell's share of Porter's net income earned since the investment was purchased
C) investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased
D) investment plus Wendell's share of Porter's net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased

Question

Quizplus · Accepted Answer

According to the equity method of accounting, the investment account includes the original cost of the investment plus or minus the investor's share of changes in the investee's net assets since the investment date. This means that Wendell's investment account would include its share of Porter's net income earned since the investment was made, but would also need to be reduced by the amount of dividends Wendell has received from Porter. Therefore, option D is the best choice as it includes both the share of net income and the dividends received.

Wendell Company Owns 28% of the Common Stock of Porter