On January 4, 2011, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2011, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2012, Mason sold 10,000 shares for $150,000. What is the balance in the investment account after the sale of the 10,000 shares?

Question

Quizplus · Accepted Answer

Mason initially records the investment at cost: $560,000. In 2011, Mason recognizes 40% of Hefly's income: $150,000 * 40% = $60,000, increasing the investment account to $620,000. Mason also recognizes 40% of the dividends as a reduction: $40,000 * 40% = $16,000, reducing the investment account to $604,000. When Mason sells 10,000 shares (25% of its 40,000 shares), it reduces the investment account by 25% of $604,000, which is $151,000. Therefore, the balance after the sale is $604,000 - $151,000 = $453,000.