Pacer Company purchased 300 of the 1,000 outstanding shares of Queen Company's common stock for $80,000 on January 2,2012.During 2013,Queen Company declared dividends of $8,000 and reported earnings for the year of $20,000. If Pacer Company uses the equity method of accounting for its investment in Queen Company,its Investment in Queen Company account at December 31,2013 should be

Question

Quizplus · Accepted Answer

Under the equity method, the investment account is initially recorded at cost, which is $80,000 in this case. The investor then recognizes its share of the investee's earnings or losses and dividends declared.

For 2013, Pacer Company's share of Queen Company's earnings is:

300/1,000 x $20,000 = $6,000

Pacer Company's share of Queen Company's dividends is:

300/1,000 x $8,000 = $2,400

The Investment in Queen Company account at December 31, 2013 is:

$80,000 (initial investment) + $6,000 (share of earnings) - $2,400 (share of dividends) = $83,600

Therefore, the correct answer is C ($83,600).

Pacer Company Purchased 300 of the 1,000 Outstanding Shares of Queen