On January 1, 2007, Rotor Corporation acquired 30 percent of Stator Company's stock for $150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 15 years. During 2007 and 2008 Stator reported net income of $25,000 and $15,000 and paid dividends of $10,000 and $12,000, respectively. Rotor uses the equity method.
-Based on the preceding information,what amount of investment income will be reported by Rotor for 2008?

Question

Quizplus · Accepted Answer

To calculate investment income under the equity method, we need to start with the initial investment of $150,000 and adjust it for our share of Stator's net income and dividends paid over the two-year period.

Year 1:
Rotor's share of Stator's net income: 30% x $25,000 = $7,500
Adjustment to investment balance: 
Beginning investment balance: $150,000
Add: Rotor's share of net income: $7,500
Ending investment balance: $157,500

Year 2:
Rotor's share of Stator's net income: 30% x $15,000 = $4,500
Rotor's share of Stator's dividends: 30% x $12,000 = $3,600
Adjustment to investment balance: 
Beginning investment balance: $157,500
Add: Rotor's share of net income: $4,500
Less: Rotor's share of dividends: ($3,600)
Ending investment balance: $158,400

The investment income for 2008 is the difference between the ending investment balance in Year 1 and the ending investment balance in Year 2: 
Investment income for 2008 = $158,400 - $157,500 = $900
Therefore, the correct answer is C) $3,500.

On January 1, 2007, Rotor Corporation Acquired 30 Percent of Stator