On January 1,2001,MNO purchased 30 percent of the 10,000 shares of the outstanding common shares,of RST for $60,000 cash (and properly computed goodwill of $5,000 amortizable over 10 years).On December 31,2001,RST reported net income of $40,000 and declared a cash dividend of $2 per share. Select the appropriate combination below for the December 31,2001,account balances to be reported by MNO. $$\begin{array}{l}
\text { Balance sheet-Dec. 31, 2001 Income Statement-2001, }\
\begin{array} { | l l l | }
\hline & \text { Investment Account } & \text { Investment Revenue } \
\hline 1 ) & \$ 60,000 & \$ 6,000 \
\hline \text { 2) } & \$ 65,500 & \$ 5,500 \
\hline 3 ) & \$ 65,500 & \$ 11,500 \
\hline \text { 4) } & \$ 65,500 & \$ 12,000 \
\hline
\end{array}
\end{array}$$

Question

On January 1,2001,MNO purchased 30 percent of the 10,000 shares of the outstanding common shares,of RST for $60,000 cash (and properly computed goodwill of $5,000 amortizable over 10 years).On December 31,2001,RST reported net income of $40,000 and declared a cash dividend of $2 per share. Select the appropriate combination below for the December 31,2001,account balances to be reported by MNO. $$\begin{array}{l}
\text { Balance sheet-Dec. 31, 2001 Income Statement-2001, }\
\begin{array} { | l l l | } 
\hline & \text { Investment Account } & \text { Investment Revenue } \
\hline 1 ) & \$ 60,000 & \$ 6,000 \
\hline \text { 2) } & \$ 65,500 & \$ 5,500 \
\hline 3 ) & \$ 65,500 & \$ 11,500 \
\hline \text { 4) } & \$ 65,500 & \$ 12,000 \
\hline
\end{array}
\end{array}$$

Quizplus · Accepted Answer

MNO's investment in RST is accounted for using the equity method. Under the equity method, MNO recognizes its share of RST's net income as investment revenue and records the investment at fair value. On December 31, 2001, MNO's share of RST's net income is $40,000 x 30% = $12,000. The fair value of MNO's investment in RST is $60,000 + $12,000 - $5,000 (amortization of goodwill) = $65,500.

On January 1,2001,MNO Purchased 30 Percent of the 10,000 Shares