On 1/1/17, Snead Company purchased 25% of Rule Corporation’s common stock. Snead

Question

On 1/1/17, Snead Company purchased 25% of Rule Corporation’s common stock. Snead appropriately carries this investment at equity (i.e., uses the equity method of accounting for the investment), and the balance in Snead’s investment account is $190,000 at 12/31/17.  Rule reported net income of $120,000 for the year ended 12/31/17, and paid common stock dividends totaling $48,000 during 2017. What was the amount of Snead’s initial investment in Rule on 1/1/17?

a.  $172,000

b.  $208,000

c.  $232,000

d.  $168,000

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Explanation / Answer

Answer

A ) 172000

value of investment = 190000 - (120000 * 25 % - 48000 *25 % )

= 190000 - 18000

= 172000

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