Figure:
Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: $\begin{array}{cccc}
\text { Year } & \begin{array}{c}
\text { Cost to } \
\text { Acker }
\end{array} & \begin{array}{c}
\text { Transfer } \
\text { Price }
\end{array} & \begin{array}{c}
\text { Amount Held by } \
\text { Howell at Year-End }
\end{array} \
2010 & \$ 55,000 & \$ 75,000 & \$ 15,000 \
2011 & \$ 70,000 & \$ 110,000 & \$ 55,000
\end{array}$ Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.
-What is the balance in Acker's Investment in Howell account at December 31, 2011?

Question

Quizplus · Accepted Answer

The correct answer is A.The balance in Acker's Investment in Howell account at December 31, 2011 is $624,000. This is calculated as follows:Initial investment: $576,000Share of Howell's net income:2010: 40% x $100,000 = $40,0002011: 40% x $120,000 = $48,000Total share of net income: $40,000 + $48,000 = $88,000Unrealized gain on inventory:2010: 40% x ($75,000 - $55,000) = $8,0002011: 40% x ($110,000 - $70,000) = $16,000Total unrealized gain: $8,000 + $16,000 = $24,000Dividends received:2010: 40% x $40,000 = $16,0002011: 40% x $40,000 = $16,000Total dividends received: $16,000 + $16,000 = $32,000Balance in Investment in Howell account:$576,000 + $88,000 + $24,000 - $32,000 = $624,000

Figure: Acker Inc Howell Reported Net Income of $100,000 in 2010 and $120,000

Figure:
Acker Inc Howell Reported Net Income of $100,000 in 2010 and $120,000