Madison Corporation purchases an investment in Lake Geneva, Inc. at a purchase price of $10 million cash, representing 40% of the book value of Lake Geneva, Inc. During the year, Lake Geneva reports net income of $1,700,000 and pays $419,000 of cash dividends. At the end of the year, the market value of Madison's investment is $12.0 million.
What is the year-end balance of the equity investment in Lake Geneva?

Question

Quizplus · Accepted Answer

Madison Corporation's year-end balance for the equity investment in Lake Geneva includes the initial investment plus their share of Lake Geneva's net income minus the dividends received. Madison owns 40% of Lake Geneva, so:- Share of net income: 40% of $1,700,000 = $680,000- Share of dividends: 40% of $419,000 = $167,600- Year-end balance = Initial investment + Share of net income - Share of dividends = $10,000,000 + $680,000 - $167,600 = $10,512,400.

Madison Corporation Purchases an Investment in Lake Geneva, Inc