Ashley Company
Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2010. During 2010, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2010 the market value of a share of Judd, Inc. stock has increased to $32 per share.
-If Ashley Company accounts for the investment as a minority,active investment and uses the equity method to account for the investment,Ashley will recognize what amount of 2010 income from the investment?

Question

Quizplus · Accepted Answer

Under the equity method, the investor recognizes its share of the investee's net income or loss and adjusts the carrying value of the investment based on the investee's reported earnings or losses.

In this case, Ashley Company holds a minority, active investment in Judd, Inc. and purchased 2,000 of the 10,000 outstanding shares for $60,000. This represents a 20% ownership stake in Judd.

Judd reported net income of $75,000 for the year and declared a dividend of $5 per share, or $50,000 in total. Ashley's share of Judd's net income under the equity method would be $15,000 (20% x $75,000).

However, the increase in the market value of Judd's stock does not affect the income recognized by Ashley under the equity method. Therefore, the answer is D) $15,000.

Ashley Company Ashley Company Purchased 2,000 of the 10,000 Outstanding Shares of Shares