On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. Gilman can exercise significant influence over Burke and properly records the investment using the equity method. The records of Burke Corporation showed the following at December 31, 2012: $$\begin{array} { | l | l | }
\hline \text { Net Income } & \$ 500,000 \
\hline \text { Dividends Paid } & \$ 200,000 \
\hline \text { Market Price per Share } & \$ 38 \
\hline
\end{array}$$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?

Question

On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. Gilman can exercise significant influence over Burke and properly records the investment using the equity method. The records of Burke Corporation showed the following at December 31, 2012: $$\begin{array} { | l | l | } 
\hline \text { Net Income } & \$ 500,000 \
\hline \text { Dividends Paid } & \$ 200,000 \
\hline \text { Market Price per Share } & \$ 38 \
\hline
\end{array}$$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?

Quizplus · Accepted Answer

Under the equity method, the investment is initially recorded at cost, and then adjusted for the investor's share of the investee's net income and dividends. Gilman initially paid $400,000 (10,000 shares x $40). Gilman's share of Burke's net income is $125,000 (10,000/40,000 x $500,000), and its share of dividends is $50,000 (10,000/40,000 x $200,000). The investment balance is $400,000 + $125,000 - $50,000 = $475,000.

On January 1, 2012, Gilman Company Purchased 10,000 of the 40,000