Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16.On the date of the investment,Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000.This difference is the result of equipment (remaining 10 year life)with a higher fair value than book value.Crush has significant influence over Carly and will account for this investment using the equity method.During the year,Carly declared dividends of $125,000 and reported Net Income of $1,300,000.What is the balance in the Investment in Carly account at year end?

Question

Quizplus · Accepted Answer

Under the equity method, the initial investment is recorded at cost, and subsequently adjusted for the investor's share of the investee's earnings and dividends.

Initial Investment: $4,500,000 
Investor's Share of Net Income: $1,300,000 x 50% = $650,000 
Investor's Share of Dividends: $125,000 x 50% = $62,500

Balance in Investment in Carly account at year end: 
$4,500,000 + $650,000 - $62,500 = $5,087,500

Therefore, the correct answer is C.

Crush Enterprises Purchased 500,000 of the 1,000,000 Outstanding Shares of Carly