Question

Mario Inc owns 40% of Luigi, Inc. and accounts for the investment using the equity method...

Mario Inc owns 40% of Luigi, Inc. and accounts for the investment using the equity method for $1,200,000 at the beginning of the year. During the year, Luigi reports a net loss of $2,400,000 and pays total dividends of $50,000. What is the value Mario Inc’s investment in Luigi at the end of the year?

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Answer #1

Mario Inc owns 40% of Luigi, Inc

A: Total value of Mario Share in the Beginning of the year = $ 1,200,000

B: Mario's share of Dividend [ $ 50,000 * 40% ] = $ 20,000

C: Share of net loss (as a decrease to its Investment account) [ $2,400,000 * 40%] = $ 960,000

VALUE OF MARIO INC'S INVESTMENT IN LUIGI AT THE END OF THE YEAR [A-B-C] = $ 220,000

NOTE: Mario Inc receives dividends of $20,000, which is 40% of $50,000, and records a reduction in their investment account. The reason for this is that they have received money from their investee. In other words, there is an outflow of cash from the investee, as reflected in the reduced investment account.

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