On January 1,2007,Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash.Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 2007 and 2008.The fair value of shares held by Yang was $110,000 and $105,000 on December 31,2007 and 2008 respectively.
-Based on the preceding information,what amount will be reported by Yang as balance in investment in Spiel on December 31,2008,if it used the equity method of accounting?

Question

Quizplus · Accepted Answer

Under the equity method, the investment account is initially recorded at cost and then adjusted each period for the investor's proportionate share of the investee's earnings and dividends.

Investment in Spiel on December 31, 2007, would be:
Cost of investment = $100,000
Yang's share of Spiel's net income = 25% x $75,000 = $18,750
Investment in Spiel at December 31, 2007, fair value = $110,000
Gain on investment = $110,000 - $100,000 = $10,000 (not recognized under equity method)
Investment in Spiel on December 31, 2007, = $100,000 + $18,750 = $118,750

Investment in Spiel on December 31, 2008, would be:
Cost of investment = $100,000
Yang's share of Spiel's net income = 25% x $75,000 = $18,750
Less: Yang's share of Spiel's dividends = 25% x $30,000 = $7,500
Investment in Spiel at December 31, 2008, fair value = $105,000
Gain on investment = $105,000 - $110,000 = ($5,000) (not recognized under equity method)
Investment in Spiel on December 31, 2008, = $118,750 + $18,750 - $7,500 = $130,000
Less: Write-down to fair value = $130,000 - $105,000 = $25,000
Investment in Spiel on December 31, 2008, after write-down = $105,000 + $18,750 - $7,500 = $116,250

Therefore, the best choice is D, $122,500, which is incorrect. The correct answer is $116,250.

On January 1,2007,Yang Corporation Acquired 25 Percent of the Outstanding