REFERENCE: Ref.01_08
On January 4,2007,Harley,Inc.acquired 40% of the outstanding common stock of Bike Co.for $2,400,000.This investment gave Harley the ability to exercise significant influence over Bike.Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.There were no other differences between book and fair values.
During 2007,Bike reported net income of $500,000.For 2008,Bike reported net income of $800,000.Dividends of $300,000 were paid in each of these two years.
-What was the reported balance of Harley's Investment in Bike Co.at December 31,2007?

Question

Quizplus · Accepted Answer

Since this is a 40% ownership investment with significant influence, the equity method should be used to account for this investment.
Under the equity method, the initial investment is recorded at cost and then adjusted each period for the investor's share of the investee's net income or loss and dividends.
Thus, the initial investment cost of $2,400,000 is recorded on Harley's books.
For 2007, Harley's share of Bike's net income is 40% x $500,000 = $200,000. No adjustment is required for dividends since they do not affect the investor's ownership percentage.
Therefore, the balance of Harley's Investment in Bike Co. at December 31, 2007, would be $2,400,000 + $200,000 = $2,600,000.
However, it is important to note that the question asks for the reported balance, which means we need to consider any impairment loss. Since there is no mention of impairment, we can assume that the reported balance is $2,600,000.
Therefore, the closest option is C) $2,480,000.

REFERENCE: Ref.01_08 on January 4,2007,Harley,Inc.acquired 40% of the Outstanding Common Stock of Stock