Jake Corporation purchases an investment in Dempsey, Inc. at a purchase price of $3.5 million cash, representing 25% of the book value of Dempsey, Inc. During the year, Dempsey, Inc. reports net income of $250,000 and pays $50,000 of cash dividends. At the end of the year, the market value of Jake's investment is $3.2 million.
Required
a. What is the year-end balance of the equity investment account?
b. What amount of investment income would be reported by Jake Corporation?
c. How are dividends treated in equity method accounting?
d. What is the amount of the unrealized gain or loss to be reported for the year?

Question

Quizplus · Accepted Answer

The Answer of Jake Corporation purchases an investment in Dempsey, Inc. at a purchase price of $3.5 million cash, representing 25% of the book value of Dempsey, Inc. During the year, Dempsey, Inc. reports net income of $250,000 and pays $50,000 of cash dividends. At the end of the year, the market value of Jake's investment is $3.2 million.
Required
a. What is the year-end balance of the equity investment account?
b. What amount of investment income would be reported by Jake Corporation?
c. How are dividends treated in equity method accounting?
d. What is the amount of the unrealized gain or loss to be reported for the year?

Jake Corporation Purchases an Investment in Dempsey, Inc