On January 1,2014,Gardner Corporation purchased 25% of the common stock outstanding of Lance Corporation for $260,000.During 2014,Lance Corporation reported net income of $80,000 and paid cash dividends of $40,000.The balance of the Equity-Method Investment account at December 31,2014 is:

Question

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Under the equity method of accounting, the initial investment is recorded at cost and adjusted annually for the investor's share of the investee's net income and dividends.

In this case, the initial investment was $260,000, and Gardner Corporation purchased 25% of the common stock outstanding of Lance Corporation.

During 2014, Lance Corporation reported net income of $80,000, of which Gardner Corporation would recognize 25% or $20,000 in its income statement.

In addition, Lance Corporation paid cash dividends of $40,000, of which Gardner Corporation would recognize 25% or $10,000 in its income statement.

Therefore, the balance of the Equity-Method Investment account at December 31, 2014, would be the initial investment of $260,000 plus Gardner Corporation's share of net income of $20,000, and dividends of $10,000, which equals $270,000.

On January 1,2014,Gardner Corporation Purchased 25% of the Common Stock