On July 1, 2009, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for 2009, and paid dividends to their shareholders of $600,000. After all closing entries are made, Tremen's "investment in Delany Company" account would have a balance of:

Question

Quizplus · Accepted Answer

The balance of Tremen's "investment in Delany Company" account at the end of the year can be calculated as follows:
Initial investment: $3,000,000
Share of Delany's income: 40% x $1,000,000 = $400,000
Share of Delany's dividends: 40% x $600,000 = $240,000
Share of Delany's retained earnings: $400,000 - $240,000 = $160,000
The share of Delany's retained earnings is only for half a year since Tremen acquired the shares on July 1st. Therefore, the final balance of Tremen's "investment in Delany Company" account is:
$3,000,000 + $160,000 = $3,160,000.

On July 1, 2009, Tremen Corporation Acquired 40% of the Shares