On January 1,20X8,Polo Corporation acquired 75 percent of Stallion Company's voting common stock for $300,000.At the time of the combination,Stallion reported common stock outstanding of $200,000 and retained earnings of $150,000,and the fair value of the noncontrolling interest was $100,000.The book value of Stallion's net assets approximated market value except for patents that had a market value of $50,000 more than their book value.The patents had a remaining economic life of ten years at the date of the business combination.Stallion reported net income of $40,000 and paid dividends of $10,000 during 20X8.
-Based on the preceding information,what balance will Polo report as its investment in Stallion at December 31,20X8,assuming Polo uses the equity method in accounting for its investment?

Question

Quizplus · Accepted Answer

The correct answer is A because the equity method requires Polo to increase its investment account for Stallion's net income and decrease it for Stallion's dividends. Stallion's net income for 20X8 was $40,000, and it paid dividends of $10,000. Therefore, Polo's investment in Stallion increased by $30,000 during 20X8. As a result, Polo's investment in Stallion at December 31, 20X8, is $300,000 (initial investment) + $30,000 (net income) - $10,000 (dividends) = $318,750.

On January 1,20X8,Polo Corporation Acquired 75 Percent of Stallion Company's