On January 1, 2014, BCD paid $600,000 for 60,000 shares of MNO's common which represents a 25 percent investment in MNO. BCD has the ability to exercise significant influence over MNO. BCD received a cash dividend of $1 per share from MNO at the end of 2014. MNO reported net income of $320,000 for the year ended December 31, 2014. The balance in BCD's investment account, at December 31, 2001, should be:

Question

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BCD's initial investment was $600,000 for 60,000 shares, which represents a 25% ownership in MNO. Since BCD has significant influence over MNO, the equity method should be used to account for the investment.

Under the equity method, BCD would record its share of MNO's net income, which is 25% of $320,000 = $80,000. In addition, BCD received a cash dividend of $1 per share, which is $60,000 (60,000 shares x $1 per share).

Therefore, the investment account balance as of December 31, 2014 would be the initial investment of $600,000 plus BCD's share of MNO's net income of $80,000 minus the cash dividend received of $60,000, which equals $620,000.

On January 1, 2014, BCD Paid $600,000 for 60,000 Shares