Pacer Company purchased 300 of the 1,000 outstanding shares of Queen Company's common stock for $80,000 on January 2,2008.During 2009,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 31,2009 should be

Question

Quizplus · Accepted Answer

Under the equity method, the investment account is initially recorded at cost and subsequently adjusted for the investor's share of the investee's earnings or losses and dividends declared.

The investment in Queen Company account would be adjusted as follows:

Initial investment: $80,000 
Pacer's share of earnings (50% of $20,000): $10,000 
Dividends received: $4,000 (50% of $8,000)

Investment in Queen Company account at December 31, 2009:

$80,000 + $10,000 - $4,000 = $86,000

However, we also need to consider any amortization of the excess of the purchase price over the fair value of identifiable net assets acquired (goodwill) that may have been recorded at the time of acquisition. If no goodwill was recorded, the answer is C.

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