On January 1, 2016, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000. Turtle uses the equity method of accounting for this investment is used. During 2016, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2016, the shares had a fair value of $160,000. At the end of 2016, the shares of Shell Corporation had a fair value of $160,000. What investment balance will be reported on Turtle's December 31, 2016 balance sheet?

Question

Quizplus · Accepted Answer

The investment balance reported on Turtle's December 31, 2016, balance sheet will be calculated as follows:
Beginning Investment Balance = $150,000
Add Net Income (30% x $40,000) = $12,000
Ending Investment Balance = $162,000
However, as the shares of Shell Corporation had a fair value of $160,000 at the end of 2016, Turtle will need to adjust the investment balance to reflect the change in fair value. This adjustment will be recorded in other comprehensive income (OCI) as follows:
Fair Value Adjustment (OCI) = $10,000 ($160,000 - $150,000)
Adjusted Investment Balance = $172,000 ($162,000 + $10,000)
But, as Turtle only owns 30% of Shell Corporation, its share of OCI will be 30% x $10,000 = $3,000
Final Investment Balance = $169,000 ($172,000 - $3,000)
Therefore, the correct answer is option C ($160,500)