Question

On January 1, Year 1, Company A purchased 25% of Company B's 100,000 outstanding shares of common stock for $10 per share. Company A applies the equity method for its investment in Company B. Company B reported a net profit of $400,000 for Year 1.

For each of the following independent situations that occurred during Year 2, select the Year 2 effect on the carrying amount of Company A's investment in Company B. Each choice may be used once, more than once, or not at all.

Situations	Answer		Choices
On December 1, Year 2, Company B declared and paid a dividend of $1 per share.	( )		A) Increase
The market price of one share of company B's common stock on December 31, Year 2, is $27.	( )		B) Decrease
Company B reported a net profit of $50,000 for Year 2.	( )		C) No Effect
On December 15, Year 2, Company B declared a dividend of $1 per share. The dividend will be paid on January 31, Year 3.	( )
On November 30, Year 2, Company B sold inventory to Company A for $29,000. The cost of this inventory was $25,000. Company A sold this inventory to third parties during Year 3.	( )
On March 1, Year 2, Company B declared and distributed a stock dividend of one share of common stock for every 10 shares of common stock owned. The market price of Company B's common stock on that date was $24 per share.	( )

Answer 1

Situations
On December 1, Year 2, Company B declared and paid a dividend of $1 per share.	B) Decrease
The market price of one share of company B's common stock on December 31, Year 2, is $27.	C) No Effect
Company B reported a net profit of $50,000 for Year 2.	A) Increase
On December 15, Year 2, Company B declared a dividend of $1 per share. The dividend will be paid on January 31, Year 3.	B) Decrease
On November 30, Year 2, Company B sold inventory to Company A for $29,000. The cost of this inventory was $25,000. Company A sold this inventory to third parties during Year 3.	B) Decrease
On March 1, Year 2, Company B declared and distributed a stock dividend of one share of common stock for every 10 shares of common stock owned. The market price of Company B's common stock on that date was $24 per share.	B) Decrease