Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation,and Heartfelt accounts for the investment using the equity method.During 2019,Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000.The carrying value of the Candle investment was $500,000 on January 1,2019.
- At what amount is the Candle investment reported on the December 31,2019 balance sheet of Heartfelt Company?
A)$496,000.
B)$500,000.
C)$536,000.
D)$540,000.

Question

Quizplus · Accepted Answer

Under the equity method, the investment is initially recorded at cost and subsequently adjusted for Heartfelt's share of Candle's net income and dividends.

Share of net income = 40% × $100,000 = $40,000
Share of dividends = 40% × $10,000 = $4,000

Therefore, the carrying value of the investment on December 31, 2019, would be:
$500,000 + $40,000 - $4,000 = $536,000

Thus, the correct answer is (C).

Heartfelt Company Owns a 40% Interest in the Voting Common