On January 2,20X5,Well Co.purchased 10 percent of Rea,Inc.'s outstanding common shares for $400,000.Well is the largest single shareholder in Rea,and Well's officers are a majority on Rea's board of directors.As a result,Well is able to exercise significant influence over Rea.Rea reported net income of $500,000 for 20X5,and paid dividends of $150,000.In its December 31,20X5,balance sheet,what amount should Well report as investment in Rea?
A) $385,000
B) $450,000
C) $400,000
D) $435,000

Question

Quizplus · Accepted Answer

Well Co. should use the equity method due to significant influence. Initial investment is $400,000. Add 10% of Rea's net income ($500,000 * 10% = $50,000) and subtract 10% of dividends received ($150,000 * 10% = $15,000). The investment is $400,000 + $50,000 - $15,000 = $435,000.