On January 1, 2017, Panda Company purchased 25% of Skill Company's common stock; no goodwill resulted from the acquisition. Panda Company appropriately carries the investment using the equity method of accounting and the balance in Panda's investment account was $190,000 on December 31, 2017. Skill reported net income of $120,000 for the year ended December 31, 2017 and paid dividends on its common stock totaling $48,000 during 2017. How much did Panda pay for its 25% interest in Skill?

Question

Quizplus · Accepted Answer

Panda's share of Skill's net income for 2017 would be 25% of $120,000, which is $30,000. Panda's share of the dividends paid by Skill would be 25% of $48,000, which is $12,000. The dividends received would decrease the balance in Panda's investment account. The ending balance in the investment account is $190,000, after accounting for Panda's share of Skill's net income and dividends paid. Therefore, the beginning balance of Panda's investment account would be $190,000 - $30,000 (share of net income) + $12,000 (dividends received) = $172,000. This means Panda paid $172,000 for its 25% interest in Skill.

On January 1, 2017, Panda Company Purchased 25% of Skill