Use the following information to answer questions 26 and 27
On January 1, 2014, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000.On the acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value.The difference was due to the increased value of buildings with a remaining life of 10 years.During 2014 Slume reported net income of $25,000 and paid dividends of $10,000.Puma uses the equity method.
-What amount of investment income will be reported by Puma for the year 2014?
A)$7,500
B)$6,000
C)$4,500
D)$25,000

Question

Quizplus · Accepted Answer

Under the equity method, the investor records its share of the investee's net income or loss.This means that Puma's share of Slume's net income for the year is 30 percent of $25,000 which is $7,500. However, Puma only recognizes 30% of the dividend paid by Slume, which is $3,000 ($10,000 x 30%), as a reduction of its investment income. Therefore, the amount of investment income Puma will report for the year 2014 is $7,500 - $3,000 = $4,500.

Use the Following Information to Answer Questions 26 and 27