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Irwin Corporation acquired a 20% interest in Allen Corporation on December 31, 2017 for $135,000. During...

Irwin Corporation acquired a 20% interest in Allen Corporation on December 31, 2017 for $135,000. During 2018, Allen had a net income of $75,000 and paid a cash dividend of $30,000. Assuming Irwin did not have significant influence over Allen Corporation, what is the balance in the investment account on December 31, 2018? a. $111,000. b. $135,000. c. $144,000. d. $150,000.

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Answer #1

The right answer is option (b) $ 135000.

Here in our case, Irwin corporation don't have any significant influence over Allen corporation. Therefore, Investment should be valued at cost i.e., $ 135000. Other way round, if there is any significant influence over the other entity then we may apply equity method where we may increase or decrease the value of investment based on profitability of the company in which investment is made to the extent of our share of investment.Therefore, the right answer is option (b) $ 135000.

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