On January 1, 2009, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2009, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2009?

Question

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Green Corporation purchased 20% of Gold Company's outstanding common stock for $300,000, which is $25,000 more than the book value of $275,000. This excess cost of $25,000 is attributable to the undervalued intangible asset, which has a remaining useful life of five years.

To calculate the carrying value of Green's investment, we need to use the equity method. Under the equity method, the investment is initially recorded at cost and then adjusted for the investor's share of the investee's earnings or losses and dividends.

Green's share of Gold's net income for the year is 20% x $125,000 = $25,000. To record this, we would debit the investment account and credit income from investment.

Similarly, Green's share of Gold's dividends is 20% x $25,000 = $5,000. We would record this by crediting the investment account and debiting cash dividends received.

The carrying value of the investment at December 31, 2009, is therefore: 
Initial investment cost: $300,000 
Add share of net income: $25,000 
Less share of dividends: ($5,000) 
Carrying value: $320,000

Therefore, the correct answer is C) $315,000.

On January 1, 2009, Green Corporation Purchased 20% of the Outstanding