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, 2012?

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, 2012?

Quizplus · Accepted Answer

The initial investment = $450,000
Cayman's share in Maya's income in 2011 = 30% * $100,000 = $30,000
Cayman's share in Maya's income in 2012 = 30% * $120,000 = $36,000
Cayman's share in Maya's dividends in 2011 = 30% * $40,000 = $12,000
Cayman's share in Maya's dividends in 2012 = 30% * $40,000 = $12,000

The carrying value of Cayman's investment at the end of 2011 = $450,000 + $30,000 - $12,000 = $468,000
The carrying value of Cayman's investment at the end of 2012 = $468,000 + $36,000 - $12,000 = $492,000

Therefore, the correct answer is option B, $489,600.