Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method.Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31,2015 and 2016,respectively.During 2016 Clor recognized $80,000 of net income and paid dividends of $30,000.Assuming that Bloomfield owned the same percentage of Clor throughout 2016,their percentage ownership must have been:

Question

Quizplus · Accepted Answer

Under the equity method, the investor must recognize their share of the investee's net income and dividends. We are given that Clor recognized $80,000 of net income and paid dividends of $30,000 in 2016. The $80,000 of net income is Clor's net income after taxes, meaning that it is their total income minus any taxes paid. We don't know the tax rate, so we can't figure out the total income.

However, we can use the dividend payment to figure out Bloomfield's percentage ownership. If Bloomfield owned 30% of Clor's outstanding shares, they would be entitled to receive 30% of any dividends paid. Since Clor paid $30,000 in dividends, that means Bloomfield would have received $9,000 in dividends (30% x $30,000). We are given that Bloomfield carried the Clor investment at $165,000 at December 31, 2016, so we can assume that this is equal to their share of Clor's equity.

If Bloomfield's share of Clor's equity was equal to $165,000, and they received $9,000 in dividends in 2016, that means their share of Clor's equity increased by $24,000 ($165,000 ending equity balance - $150,000 beginning equity balance - $9,000 dividends received). This $24,000 increase in equity represents Bloomfield's share of Clor's net income.

To figure out the percentage ownership, we can use the following formula:
Bloomfield's share of Clor's net income / Clor's net income = Bloomfield's percentage ownership
Plugging in the numbers we have:
$24,000 / $80,000 = 0.3 or 30%

Therefore, the best choice is C) 30%.

Bloomfield Bakers Accounts for Its Investment in Clor Confectionary Under