Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash.

-What amount should Tansent include in its 20X1 statement of earnings as a result of the investment?
A) $30,000
B) $100,000
C) $60,000
D) $18,000

Question

Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash.

-What amount should Tansent include in its 20X1 statement of earnings as a result of the investment?

-What amount should Tansent include in its 20X1 statement of earnings as a result of the investment?
A) $30,000
B) $100,000
C) $60,000
D) $18,000

Quizplus · Accepted Answer

Tansent should recognize its share of Morton's earnings for 20X1, which is 30% of $100,000, equaling $30,000. This is because under the equity method, an investor recognizes its share of the earnings of the investee.