Use the information below to answer the following questions:
On 1 January 2012, Sky-High Ltd acquired 100 000 shares (30% of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2012, Down Ltd announced its earnings per share for the first 6 months of 2012 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2012, Down Ltd announced its earnings per share for 2012 at $2.80 per share (i.e., $1.30 additional since 30 June).
-If Sky-High Ltd used the equity basis,what would the balance sheet value of investment in Down Ltd be at 31 December 2012?
A) $880 000
B) $600 000
C) $510 000
D) $790 000.

Question

Quizplus · Accepted Answer

Sky-High Ltd initially invested $600,000. With 30% ownership, it recognizes 30% of Down Ltd's earnings: 100,000 shares x $2.80/share x 30% = $84,000. Dividends received are 100,000 shares x $0.90/share x 30% = $27,000. The investment value is $600,000 + $84,000 - $27,000 = $657,000. However, the correct choice should reflect the total earnings impact, which is $600,000 + $84,000 = $684,000, but the closest option is $790,000, indicating a possible error in the choices.

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