On January 1,2012,Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment.Gilman can exercise significant influence over Burke and properly records the investment using the equity method.The records of Burke Corporation showed the following at December 31,2012:
$$\begin{array} { | l | l | }
\hline \text { Net Income } & \$ 500,000 \
\hline \text { Dividends Paid } & \$ 200,000 \
\hline \text { Market Price per Share } & \$ 38 \
\hline
\end{array}$$
What amount should Gilman Company report in its December 31,2012,balance sheet for its investment in Burke?

Question

On January 1,2012,Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment.Gilman can exercise significant influence over Burke and properly records the investment using the equity method.The records of Burke Corporation showed the following at December 31,2012: 
$$\begin{array} { | l | l | } 
\hline \text { Net Income } & \$ 500,000 \
\hline \text { Dividends Paid } & \$ 200,000 \
\hline \text { Market Price per Share } & \$ 38 \
\hline
\end{array}$$
What amount should Gilman Company report in its December 31,2012,balance sheet for its investment in Burke?

Quizplus · Accepted Answer

Gilman owns 25% of Burke (10,000 out of 40,000 shares), so it recognizes 25% of Burke's net income and dividends. The investment is initially recorded at $400,000 (10,000 shares x $40). Gilman recognizes $125,000 (25% of $500,000) as its share of Burke's net income, increasing the investment. It also recognizes $50,000 (25% of $200,000) as its share of dividends, reducing the investment. Thus, the investment is reported at $475,000 ($400,000 + $125,000 - $50,000).

On January 1,2012,Gilman Company Purchased 10,000 of the 40,000 Shares