Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, and Heartfelt accounts for the investment using the equity method. During 2014, Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 2014. At what amount is the Candle investment reported on the December 31, 2014 balance sheet?
A) $496,000.
B) $500,000.
C)$536,000.
D)$540,000.

Question

Quizplus · Accepted Answer

Under the equity method, the investment account is initially recorded at cost and is subsequently adjusted for the investor's share of the investee's earnings or losses and dividends declared. The investment account is reported as part of non-current assets on the investor's balance sheet. Therefore, the investment in Candle Corporation should be reported at its carrying value of $536,000 ($500,000 + 40%*$100,000 - 40%*$10,000) on the December 31, 2014 balance sheet. Choice C is the correct answer.

Heartfelt Company Owns a 40% Interest in the Voting Common