Use the following information to solve the following questions:
During calendar 2020, Davel Corp. reported net income of $ 45,000 and paid total cash dividends of $ 15,000. Ryan Inc. owns 2,250 of the 7,500 outstanding shares of Davel and exercises significant influence.
-On December 31, 2020, Ryan Corp. acquired a 40% interest in Gosling Corp. for $ 315,000. During 2021, Gosling reported net income of $ 200,000 and paid total cash dividends of $ 50,000. Assuming Ryan uses the equity method, at December 31, 2021, the balance in the investment account should be
A) $ 395,000.
B) $ 295,000.
C) $ 375,000.
D) $ 255,000.

Question

Quizplus · Accepted Answer

For Davel Corp:
Ryan Inc. owns 2,250/7,500 shares, which is a 30% interest (2,250/7,500 = 0.30). Since Ryan exercises significant influence, it should use the equity method to account for the investment.
Ryan's share of Davel's net income is $ 45,000 × 0.30 = $ 13,500. Subtracting Ryan's share of dividends ($ 15,000 × 0.30 = $ 4,500) gives a net increase of $9,000 in the investment account for 2020.

For Gosling Corp:
Ryan's initial investment is $ 315,000 × 0.40 = $ 126,000.
Ryan's share of Gosling's net income is $ 200,000 × 0.40 = $ 80,000. Subtracting Ryan's share of dividends ($ 50,000 × 0.40 = $ 20,000) gives a net increase of $60,000 in the investment account for 2021.
Therefore, the balance in the investment account at December 31, 2021 is $ 126,000 + $60,000 + $9,000 = $ 195,000. However, since the question asks for the balance in the account using the equity method (which includes adjustments for amortization of any difference between the cost of the investment and Ryan's share of Gosling's net assets), we cannot directly use this calculated balance.

Assuming there is no difference between the cost of the investment and Ryan's share of Gosling's net assets, the balance in the investment account using the equity method is simply the total of net income less dividends received, or $ 80,000 - $ 20,000 = $ 60,000. Adding this to the post-2020 balance of $ 126,000 gives a total investment balance of $ 126,000 + $ 60,000 = $ 186,000.
However, if there is any difference between the cost of the investment and Ryan's share of Gosling's net assets, the balance in the investment account will be different. Without more information provided on this point, we cannot be certain of the exact balance in the investment account. Therefore, the best answer choice is C, as it reflects the closest calculated balance using the given information.

Use the Following Information to Solve the Following Questions