On January 1, 2011, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2011, and paid dividends of $100,000 during that year. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2011?

Question

On January 1, 2011, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:  Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2011, and paid dividends of $100,000 during that year. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2011?

Quizplus · Accepted Answer

The investment in Rob Co. account balance is calculated as follows:

Initial investment = $2,000,000
Share of net income (30% x $300,000) = $90,000
Balance before dividend = $2,090,000
Share of dividend (30% x $100,000) = $30,000
Balance after dividend = $2,060,000

Therefore, the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2011 is $2,060,000 (Option C is incorrect as it is the initial investment balance without any adjustments for net income or dividends).