Question

An investor company owns 30% of the common stock of an investee company. The investor has significant influence over the investee, and acquired its equity interest in the investee on January 1, 2018 for $525,000. On the date of acquisition, the investee’s stockholders equity was $1,500,000, and the fair values of the investee’s individual net assets were equal to their reported book values. During the year ended December 31, 2018, the investee reported net income of $50,000 and dividends of $10,000. During the year ended December 31, 2019, the investee reported net income of $60,000 and dividends of $15,000. The investor routinely sells inventory to the investee at a 25% profit margin. At December 31, 2018 and 2019, the investee held inventories purchased from the investor for $30,000 and $40,000, respectively. (At the end of each period, all of these inventories are sold by the investee to unaffiliated companies in the next period.)

What is the balance in the Equity Investment account on December 31, 2019?

Select one:

a. $ 547,500

b. $ 550,500

c. $ 570,000

d. $ 525,000

Answer 1