Use the following information for questions
Desmond Corporation owns 3,000 of the 10,000 outstanding ordinary shares of Wetmore Corporation.During 2011, Wetmore earned £2,400,000 and paid cash dividends of £800,000.
-What balance should Desmond report on its December 31, 2011 statement of financial position for the investment account if the beginning of the year balance in the account was £3,200,000?

Question

Use the following information for questions 
Desmond Corporation owns 3,000 of the 10,000 outstanding ordinary shares of Wetmore Corporation.During 2011, Wetmore earned £2,400,000 and paid cash dividends of £800,000.
-What balance should Desmond report on its December 31, 2011 statement of financial position for the investment account if the beginning of the year balance in the account was £3,200,000?

Quizplus · Accepted Answer

Desmond owns 30% (3,000/10,000) of Wetmore's outstanding ordinary shares. Therefore, Desmond is entitled to 30% of Wetmore's earnings, which is £720,000 (30% x £2,400,000). Since Desmond owns only ordinary shares in Wetmore and does not have significant influence over its operations, the equity method of accounting is not appropriate. Instead, Desmond should account for its investment using the cost method. Under the cost method, the investment account is initially recorded at cost (£3,200,000) and is subsequently adjusted for dividends received (£800,000) and the investor's share of earnings (£720,000). Therefore, the balance in the investment account at the end of the year should be £3,680,000 (£3,200,000 + £720,000 - £800,000).

Use the Following Information for Questions