Barking Power Company accounts for its 35% investment in Pipeline Corporation under the equity method of accounting. The investment was made on January 1, 2020, at a cost of $625,000. Pipeline Corporation reported net income of $85,000 for the year ended December 31, 2020, and paid total dividends of $20,000 during 2020. On December 31, 2020, after making all appropriate entries, the balance in Barking Power Company's Long-Term Investment account will equal:
A) $647,750
B) $583,000
C) $690,000
D) $602,250

Question

Quizplus · Accepted Answer

Under the equity method, the investor recognizes its share of the investee's net income and dividends. Barking Power Company's share of Pipeline Corporation's net income is 35% of $85,000, which is $29,750. The share of dividends is 35% of $20,000, which is $7,000. The investment account is increased by the share of net income and decreased by the share of dividends. Therefore, the balance is $625,000 + $29,750 - $7,000 = $647,750.

Barking Power Company Accounts for Its 35% Investment in Pipeline