Use the following information to solve the following questions:
Red Corp. owns 3,000 of the 10,000 outstanding common shares of Grey Corp. and exercises significant influence. During 2020, Grey reported net income of $ 120,000 and paid total cash dividends of $ 40,000.
-If the beginning 2020 balance in the Investment in Grey Corp. account was $ 180,000, the balance at December 31, 2020 should be
A) $ 260,000.
B) $ 204,000.
C) $ 180,000.
D) $ 132,000.

Question

Quizplus · Accepted Answer

Since Red Corp. exercises significant influence over Grey Corp., it accounts for this investment under the equity method of accounting. Under this method, the Investment in Grey Corp. account is initially recorded at cost ($180,000), and subsequently adjusted for the investor's share of the investee's earnings (net income) and dividends.
Red Corp.'s share of Grey Corp.'s net income for 2020 is calculated as follows:
3,000/10,000 x $120,000 = $36,000
This amount is added to the beginning balance of $180,000 to get the adjusted balance:
$180,000 + $36,000 = $216,000
However, Red Corp. also received dividends from Grey Corp. during 2020, which reduces the investment account balance:
3,000/10,000 x $40,000 = $12,000
The dividend amount is subtracted from the adjusted balance to arrive at the ending balance at December 31, 2020:
$216,000 - $12,000 = $204,000

Therefore, the correct answer is B, $204,000.

Use the Following Information to Solve the Following Questions