Use the following information for questions.
The summarized balance sheets of Thunder Bay Corp.and Fort William Corp.at December 31, 2017 are as follows:
-If Thunder Bay acquired a 20% interest in Fort William on December 31, 2017 for $45,000, and during 2018 Fort William reported net income of $25,000 and paid a total cash dividend of $10,000, applying the equity method would give a debit balance in the Investment in Fort William Corp.account at the end of 2018 of
A)$37,000.
B)$45,000.
C)$48,000.
D)$50,000.

Question

Use the following information for questions.
The summarized balance sheets of Thunder Bay Corp.and Fort William Corp.at December 31, 2017 are as follows: 
-If Thunder Bay acquired a 20% interest in Fort William on December 31, 2017 for $45,000, and during 2018 Fort William reported net income of $25,000 and paid a total cash dividend of $10,000, applying the equity method would give a debit balance in the Investment in Fort William Corp.account at the end of 2018 of
A)$37,000. 
B)$45,000. 
C)$48,000. 
D)$50,000.

Quizplus · Accepted Answer

When using the equity method, the initial investment cost plus the share of net income earned by the investee minus the dividends received from the investee is used to determine the remaining balance in the Investment in Fort William Corp.account. Therefore,
Initial investment cost = $45,000
Share of net income earned by the investee (20% x $25,000) = $5,000
Dividends received from the investee (20% x $10,000) = $2,000
Investment balance at the end of 2018 = $45,000 + $5,000 - $2,000 = $48,000
Therefore, the debit balance in the Investment in Fort William Corp.account at the end of 2018 will be $48,000.

Use the Following Information for Questions