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. At what amount is the Candle investment reported on the December 31, 2016 balance sheet of Heartfelt Company?
A)$496,000.
B)$500,000.
C)$536,000.
D)$540,000.

Question

Quizplus · Accepted Answer

The equity method records the investor's share of the earnings and dividends of the investee. Heartfelt Company’s share of Candle Corporation's net income for 2016 is $40,000 ($100,000 x 40%). The $10,000 of dividends received also represent 40% of the dividends declared and paid by Candle Corporation. The investment's carrying value on December 31, 2016, will be $536,000 ($500,000 beginning balance + $40,000 net income - $10,000 dividends received). Therefore, the correct answer is option C.

Heartfelt Company Owns a 40% Interest in the Voting Common