On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000.
-What investment balance will be reported on Turtle's December 31, 20X4 statement of financial position?
A) $150,000
B) $160,000
C) $160,500
D) $162,000

Question

On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. 
-What investment balance will be reported on Turtle's December 31, 20X4 statement of financial position?
A) $150,000
B) $160,000
C) $160,500
D) $162,000

Quizplus · Accepted Answer

Turtle Inc. uses the equity method to account for its investment in Shell Corporation. Under the equity method, Turtle Inc. records its share of Shell Corporation's net earnings and dividends as income and expenses, respectively. At the end of the year, Turtle Inc. adjusts its investment account to reflect the change in Shell Corporation's net assets.In this case, Turtle Inc. owns 30% of Shell Corporation's outstanding shares. Therefore, Turtle Inc.'s share of Shell Corporation's net earnings for 20X4 is $12,000 (30% x $40,000). Turtle Inc. also received $1,500 in cash dividends from Shell Corporation (30% x $5,000).Turtle Inc.'s investment in Shell Corporation at the end of 20X4 is $160,500. This is calculated as follows:Beginning investment balance: $150,000Add: Share of net earnings: $12,000Add: Cash dividends received: $1,500Less: Unrealized gain on investment: $1,000Ending investment balance: $160,500