On January 4,2006,Watts Co.purchased 40,000 shares (40%)of the common stock of Adams Corp. ,paying $800,000.There was no goodwill or other cost allocation associated with the investment.Watts has significant influence over Adams.During 2006,Adams reported income of $200,000 and paid dividends of $80,000.On January 2,2006,Watts sold 5,000 shares for $125,000.What was the balance in the investment account after the shares had been sold?

Question

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The initial investment was $800,000 for 40,000 shares, which gives us a cost per share of $20. 
After selling 5,000 shares, Watts would have 35,000 shares left. 
The value of those 35,000 shares (at the original cost of $20 per share) would be: 
35,000 shares x $20 = $700,000. 
In addition, Watts received $125,000 from the sale of the 5,000 shares. 
Therefore, the total balance in the investment account is: 
$700,000 (remaining shares) + $125,000 (from sale of shares) = $825,000. 
However, since Adams Corp. paid dividends of $80,000 in 2006, we subtract that from the total: 
$825,000 - $80,000 = $745,000. 
Finally, we need to adjust for Watts' share of Adams' 2006 income: 
40% of $200,000 = $80,000. 
So the final balance in the investment account would be: 
$745,000 - $80,000 = $665,000. 
Therefore, the correct answer is B) $742,000.