On January 1, 2014, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000. Turtle uses the equity method of accounting for this investment is used. During 2014, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2014, the shares had a fair value of $160,000. What investment balance will be reported on Turtle's December 31, 2014 balance sheet?
A) $150,000.
B) $162,000.
C)$160,500.
D)$170,500.

Question

Quizplus · Accepted Answer

Under the equity method, the investment balance is adjusted annually to reflect the investor's share of the investee's net income and dividends. 
Beginning investment balance: $150,000
Investor's share of 2014 net income (30% x $40,000): $12,000 
Dividends received (30% x $5,000): -$1,500 
Ending investment balance (original cost + share of net income - dividends + fair value adjustment): 
$150,000 + $12,000 - $1,500 + ($160,000 - $150,000) = $160,500. 
Therefore, the correct answer is C.