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On 1/1/19, Investor purchased 3,000,000 of the outstanding 10,000,000 shares of Investee for $2,000,000. For 2019,...

On 1/1/19, Investor purchased 3,000,000 of the outstanding 10,000,000 shares of Investee for $2,000,000. For 2019, Investee declared total dividends to all shareholders of $275,000 and reported Net Income of $1,250,000. What is the balance in the Equity Method Investment on Investor’s 2019 Bal. Sheet

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Answer #1

Number of shares purchased = 3,000,000

Number of outstanding shares of investee = 10,000,000

Percentage of shares purchased = Number of shares purchased/Number of outstanding shares of investee

= 30%

Cost of investment = $2,000,000

Total dividend declared by investee = $275,000

Net income of investee = $1,250,000

Share of dividend from investee = Total dividend declared by investee x Percentage of shares purchased

= 275,000 x 30%

= $82,500

Share of net income of investee = Net income of investee x Percentage of shares purchased

= 1,250,000 x 30%

= $375,000

Balance in the Equity Method Investment on Investor’s 2019 Bal. Sheet = Cost of investment + Share of net income of investee - Share of dividend from investee

= 2,000,000 + 375,000 - 82,500

= $2,292,500

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