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, 2011?

Question

Quizplus · Accepted Answer

Harley's investment is initially recorded at cost ($2,400,000). For 2010, Harley's share of Bike's net income is 40% of $500,000 = $200,000, and for 2011, it is 40% of $800,000 = $320,000. Harley's share of dividends for each year is 40% of $300,000 = $120,000. The investment balance at the end of 2011 is $2,400,000 + $200,000 + $320,000 - $120,000 - $120,000 = $2,680,000.