During January 2010, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2010, Wilton reported net income of $600,000. For 2011, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2011?

Question

Quizplus · Accepted Answer

The correct answer is A.The investment in Wilton Co. is accounted for using the equity method. Under the equity method, Wells will recognize its share of Wilton's net income and dividends.Wells' share of Wilton's net income for 2010 is $600,000 x 30% = $180,000. Wells' share of Wilton's net income for 2011 is $750,000 x 30% = $225,000.Wells' share of Wilton's dividends for 2010 is $200,000 x 30% = $60,000. Wells' share of Wilton's dividends for 2011 is $200,000 x 30% = $60,000.The reported balance of Wells' Investment in Wilson Co. at December 31, 2011 is $1,400,000 (cost) + $180,000 (share of net income for 2010) + $225,000 (share of net income for 2011) - $60,000 (share of dividends for 2010) - $60,000 (share of dividends for 2011) = $1,609,000.