Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5.
-What amount should Grant include in its 20X4 income statement as a result of the investment?

Question

Quizplus · Accepted Answer

Grant's 30 percent interest in South gives them significant influence, but not control. Therefore, Grant should account for the investment using the equity method. 
In 20X4, Grant should record income of $24,000 ($80,000 x 30%) and a dividend received of $15,000 ($50,000 x 30%). 
In July 20X5, Grant sells half of its stock in South for $150,000, resulting in a gain of $50,000 ($150,000 - $100,000 carrying value of the investment). 
In October 20X5, Grant would receive a dividend of $18,000 ($60,000 x 30%). 
Therefore, the total income recognized from the investment in 20X5 would be $68,000 ($100,000 x 30% + $18,000).