Cayman Inc. bought 30% of Maya Company on January 1, 2011 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2011?

Question

Cayman Inc. bought 30% of Maya Company on January 1, 2011 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:  Maya reported net income of $100,000 in 2011 and $120,000 in 2012 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2011?

Quizplus · Accepted Answer

The initial investment of Cayman in Maya was $450,000, and it bought 30% of Maya Company. Therefore, the book value and fair value of the net assets of Maya were $1,500,000, and the proportional value acquired by Cayman is $450,000 / 30% = $1,500,000.

In 2011, Maya reported a net income of $100,000, and since Cayman uses the equity method of accounting, it increases its investment in Maya by its proportional share of the net income:

$1,500,000 × 30% × 1 year = $450,000 × 0.3 = $135,000

The dividends paid by Maya do not affect the Investment in Maya account.

Therefore, the balance in Cayman's Investment in Maya account at December 31, 2011, is:

Initial Investment + Share of net income - Dividends = $450,000 + $135,000 - $40,000 = $545,000

Hence, the correct answer is B) $467,100.