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,had Rotor Corporation used the cost method,what would have been the balance in the investment account on Dec 31,2008?

Question

Quizplus · Accepted Answer

If Rotor Corporation used the cost method, the investment account would have remained at its initial cost of $150,000, since the cost method does not allow for adjustments to the investment account based on changes in fair value or earnings of the investee. Therefore, the balance in the investment account on Dec 31, 2008 would still be $150,000.

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