Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, and Heartfelt accounts for the investment using the equity method. During 2016, Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 2016. How much investment income should Heartfelt report during 2016 from the Candle investment?
A)$36,000.
B)$40,000.
C)$4,000.
D)$10,000.

Question

Quizplus · Accepted Answer

Heartfelt owns a 40% interest in Candle Corporation, so Heartfelt would report 40% of Candle's net income as investment income using the equity method.
Investment income = 40% x $100,000 = $40,000
Heartfelt would also receive 40% of Candle's cash dividend, which amounts to $10,000.
Since the carrying value of the investment was $500,000 at the beginning of the year and we add the investment income $40,000 while subtracting dividends received $10,000. Thus; the carrying value at the end of the year would be $530,000.

Heartfelt Company Owns a 40% Interest in the Voting Common