If Jensen, Inc. paid $4,000 at book value for its 25% stake in Storm Company, and in the next year total shareholders' equity for Storm Company increases by 75%, what will Jensen's interest of Storm's equity be?
Jensen uses the equity method to account for its investment in Storm Company.

Question

Quizplus · Accepted Answer

Jensen's initial investment is $4,000 for a 25% stake. With a 75% increase in Storm's equity, Jensen's share increases by 75% of $4,000, which is $3,000. Adding this to the initial investment, Jensen's interest becomes $4,000 + $3,000 = $7,000.