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10)Pace Company owns 80% of the common stock of Speed Co. and uses the equity method...

10)Pace Company owns 80% of the common stock of Speed Co. and uses the equity method to account for the investment. During 2017, Speed reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2017, how will Pace’s investment account change related to this investment?

A. $136,000 increase.
B. $200,000 increase.
C. $0 change.
D. $136,000 decrease.
E. $200,000 decrease.

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Answer #1

Answer is option (A). $136000 increase

Explanation;

As per equity method, value of investment in subsidiary company is adjusted as follow;

Add: Share in the profits of subsidiary company

Less: Share in dividend given by subsidiary company

So on the basis of above formula let’s calculate increase or decrease in the value of investment;

Pace Company share if profits of Speed Co. ($250000 * 80 / 100) = $200000

Dividend received by pace company ($80000 * 80/100) = $64000

Thus net increase in the value of investment ($200000 – $64000) = $136000

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