Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the balance in Cayman's Investment in Maya account at December 31, 2021?

Question

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:  Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the balance in Cayman's Investment in Maya account at December 31, 2021?

Quizplus · Accepted Answer

Cayman's initial investment in Maya was $450,000 for a 30% ownership, which implies that Maya had a book value of $1,500,000 on that date. Since the equity method was used, the investment account would be initially recorded at the cost of the investment, which in this case is $450,000.

Maya's net income for 2021 was $100,000, and since Cayman owns 30% of Maya, Cayman would report $30,000 ($100,000 x 30%) as its share of income from Maya, which would be added to the investment account.

Maya also paid dividends of $40,000 in 2021, of which Cayman's share would be $12,000 ($40,000 x 30%), and would be subtracted from the investment account.

Therefore, Cayman's investment in Maya at December 31, 2021, would be $450,000 + $30,000 - $12,000 = $468,000.

The closest answer to this value is option B ($467,100), which is due to possible rounding.