On January 1, 2016, American Corporation purchased 30% of the outstanding voting
ID: 2474367 • Letter: O
Question
On January 1, 2016, American Corporation purchased 30% of the outstanding voting shares of Short Supplies common stock for $240,000 cash. On that date, Short's book value and fair value were both $800,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2016, was $76,000. During 2016, Short also paid cash dividends in the amount of $22,000.
On January 1, 2016, American Corporation purchased 30% of the outstanding voting shares of Short Supplies common stock for $240,000 cash. On that date, Short's book value and fair value were both $800,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2016, was $76,000. During 2016, Short also paid cash dividends in the amount of $22,000.
Explanation / Answer
As per equity method of valuation, The total equity available is Fair value + Income - dividend
Total Equity = $ 800,000 + $ 76,000 - $ 22,000
= $ 854,000
Total amount of investment = 30% 0f $ 854,000 = $ 256,200
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