4) On January 2, Year 9, Bradley, Inc. acquired 30% of Norden Co.’s voting stock

Question

4) On January 2, Year 9, Bradley, Inc. acquired 30% of Norden Co.’s voting stock for $200,000. Bradley’s 30% interest in Norden gave Bradley the ability to exercise significant influence over Norden’s operating and financial policies. During Year 9, Norden earned $80,000 and paid dividends of $50,000. Bradley does not elect the fair value option to report this investment. In Bradley’s December 31, Year 9 balance sheet, what should be the carrying amount of this investment?

$191,000

$209,000

$230,000

$239,000

Explanation / Answer

Solution:

Cost of investment acquired = $200,000

Investment income to be recognized using equity method in year 9 = $80,000 * 30% = $24,000

Dividend received = $50,000*30% = $15,000

Hence carrying value of equipment for Year 9 = Cost of investment + Investment income - Dividend received

= $200,000 + $24,000 - $15,000 = $209,000

Hence 2nd option is correct.

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