On January 4, 2010, 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 2010, Bike reported net income of $500,000. For 2011, 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, 2010?

Question

Quizplus · Accepted Answer

Harley's initial investment in Bike of $2,400,000 represents the cost of the investment. Since it has a 40% ownership interest, Harley's share of Bike's net income for 2010 would be $500,000 × 40% = $200,000. This amount is recognized as income on Harley's books and increases the balance in the investment account to $2,600,000. The dividends are not accounted for as income but as a reduction to the investment account. Therefore, the reported balance of Harley's Investment in Bike Co. at December 31, 2010, would be $2,480,000 ($2,600,000 - $300,000).