The Mon Corporation acquired a 30% interest in the Soon Company on 1/1/2014 for $600,000. At that time, Soon had 2,000,000 shares of its common stock issued and outstanding. During 2014, Soon paid cash dividends of $20,000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share. Soon's net income for 2014 was $120,000. What should be the balance in Mon's investment in Soon Co. account at the end of 2014? ( Assume the company uses the equity method to record the investments)

Question

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The initial investment was $600,000 for 30% ownership, implying that the total value of Soon at that time was $2,000,000 (since 600,000/0.30 = 2,000,000).
After Soon paid the cash dividend, Mon's investment account would decrease by 30% of $20,000, or $6,000, leaving a balance of $594,000 ($600,000 - $6,000).
Then, when Soon issued the 5% stock dividend, the number of outstanding shares increased to 2,100,000 (2,000,000 x 1.05). Mon's ownership percentage would decrease to 28.57% (since 600,000/2,100,000 = 0.2857), but the value of Mon's investment would remain the same. Thus, Mon's investment account would increase by 28.57% of $2 per share x 100,000 new shares, or $57,140, bringing the balance to $651,140.
Finally, Mon's share of Soon's net income for the year would be 28.57% of $120,000, or $34,284. This would increase Mon's investment account to $685,424.
However, since Mon's ownership percentage changed during the year, the balance in Mon's investment account at the end of the year would be adjusted based on the weighted average ownership percentage. The weighted average ownership percentage for the year can be calculated as:
((0.30 x 1/365) x 364) + ((0.2857 x 1/365) x 365) = 0.2981
Therefore, the final balance in Mon's investment account would be the weighted average ownership percentage multiplied by Soon's total value at the end of the year:
$2,000,000 + ($120,000 - $20,000) - ($651,140 - $600,000) x 0.2981 = $630,385
Rounding this to the nearest thousand gives the answer of $630,000.

The Mon Corporation Acquired a 30% Interest in the Soon