Eagle Exporters purchased 40,000 of the 100,000 outstanding shares of Giant Distributors for $2,000,000.Eagle has significant influence over Giant and will account for this investment using the equity method.During the year,Giant declared dividends of $140,000 and reported Net Income of $800,000.What is the balance in the Investment in Giant account at year end?

Question

Quizplus · Accepted Answer

- The equity method requires that the investor company recognize its share of the investee company's net income and dividends declared.
- Eagle owns 40% (40,000/100,000) of Giant Distributors and therefore their share of net income is $320,000 (40% x $800,000) and their share of dividends declared is $56,000 (40% x $140,000).
- The balance in the Investment in Giant account at year end is the initial investment of $2,000,000 plus the share of net income and dividends declared which is $2,264,000 ($2,000,000 + $320,000 - $56,000). 
- Therefore, the correct choice is D ($2,264,000).

Eagle Exporters Purchased 40,000 of the 100,000 Outstanding Shares of Giant