please show calculation and pick an answer Editing Gra Question 26 Bell Company
ID: 2521371 • Letter: P
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please show calculation and pick an answer
Editing Gra Question 26 Bell Company purchases 80% of Demers Company for $500,000 on January 1, 2011 . Demers reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess cost over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2011 2012 2013 Net Income Dividends $100,000 $120.000 S130,000 40,000 50,000 60,000 Assume the equity method is applied. Compute Bell's investment in Demers at December 31, 2011. $580,000 $574,400. $548,000. O $542,400. S532,000.Explanation / Answer
Under the equity method, the investor begins as a baseline with the cost of its original investment in the investee,and then in subsequent periods recognizes its share of the earnings or losses of the investee, both as adjustments to its original investment as noted on its balance sheet and also in the investor's income statement. If the investee issues dividends to the investor, the investor should deduct the amount of these dividends from the carrying amount of its investment in the investee. Computation of Bell's Investment in Demers at December 31,2011 using Equity Method Purchase cost of Demers shares $500,000.00 Add : Share in Net Income of Demers for 2011 (80% of $100000) $80,000.00 Less : Dividend received from Demers for 2011 (80% of $40000) $32,000.00 Bell's investment in Demers at Dec.31,2011 $548,000.00
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