Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and accordingly uses the equity method to account for its investment. The stock was purchased on January 1, 2015 for $880,000. During the year ended December 31, 2015, Hallmark, Inc. reported the following:Dividends declared and paid $ 400,000Net income 2,400,000Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc. uses the LIFO method to conform with other companies in its industry. Haystack, Inc. determines that if Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher during 2015. What is the balance in the Investment in Hallmark, Inc. that will be reported on Haystack, Inc.'s balance sheet at December 31, 2015 assuming Haystack, Inc. follows IFRS for its external financial reporting?
A) $1,825,000
B) $1,480,000
C) $1,585,000
D) $1,375,000

Question

Quizplus · Accepted Answer

First, we need to calculate the share of the net income reported by Hallmark, Inc. that belongs to Haystack, Inc.
Net income reported by Hallmark, Inc. = $2,400,000
Haystack, Inc.'s share of net income = 30% x $2,400,000 = $720,000
Next, we need to adjust for the effect of the LIFO method used by Hallmark, Inc.
If Hallmark, Inc. had used the FIFO method, its income would have been $350,000 higher. Since Haystack, Inc.'s share of net income is 30%, the adjustment to Haystack, Inc.'s share of net income is:
$350,000 x 30% = $105,000
Therefore, Haystack, Inc.'s share of net income using the FIFO method would have been:
$720,000 + $105,000 = $825,000
Finally, we can calculate the balance in the Investment in Hallmark, Inc. account:
Original investment = $880,000
Add Haystack, Inc.'s share of dividends declared and paid = $400,000 x 30% = $120,000
Add Haystack, Inc.'s adjusted share of net income = $825,000
Investment in Hallmark, Inc. balance at December 31, 2015 = $880,000 + $120,000 + $825,000 = $1,825,000
Therefore, the correct answer is choice C.