Clark Corporation purchased 40% of IT Corporation for $125,000 on January 1. On May 20 of the same year, IT Corporation declared total cash dividends of $30,000. At year-end, IT Corporation reported net income of $150,000. The balance in Clark Corporation's Long-Term Investment-IT Corporation account as of December 31 should be:

Question

Quizplus · Accepted Answer

Clark Corporation's initial investment of $125,000 in IT Corporation represents 40% ownership. The total dividends received from IT Corporation during the year are $30,000, of which Clark Corporation would receive 40% or $12,000 (0.40 x $30,000). The dividend received reduces the cost of the investment in IT Corporation as follows:
Purchase price $125,000
Less dividend received ($12,000)
Adjusted cost of investment $113,000
Clark Corporation's equity in the earnings of IT Corporation during the year is $60,000 (0.40 x $150,000). The closing balance in the Long-Term Investment-IT Corporation account would be the adjusted cost of investment plus the equity earnings, or $173,000 ($113,000 + $60,000). Therefore, the correct answer is C.

Clark Corporation Purchased 40% of IT Corporation for $125,000 on January