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Red Corp.owns 3,000 of the 10,000 outstanding common shares of Grey Corp.and exercises significant influence.During 2017, Grey reported net income of $120,000 and paid total cash dividends of $40,000.
-If the beginning 2017 balance in the Investment In Grey Corp.account was $180,000, the balance at December 31, 2017 should be
A)$260,000.
B)$204,000.
C)$180,000.
D)$132,000.

Question

Quizplus · Accepted Answer

Since Red Corp. exercises significant influence over Grey Corp., they use the equity method to account for their investment. Using the equity method, the Investment In Grey Corp. account is initially recorded at the cost of acquiring the shares, which is $180,000 in this case. Then, the balance is adjusted for Red Corp.'s share of Grey Corp.'s net income and dividends.

Red Corp.'s share of Grey Corp.'s net income is 3,000/10,000 x $120,000 = $36,000. This amount is added to the beginning balance of $180,000 to get a new balance of $216,000.

Red Corp.'s share of Grey Corp.'s dividends is 3,000/10,000 x $40,000 = $12,000. This amount is subtracted from the new balance of $216,000 to get a final balance of $204,000.

Therefore, the balance at December 31, 2017 should be $204,000.

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