Question

Pare, Inc., purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2, 20X1, for $50,000. On December 31, 20X1, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 20X1. Tot reported earnings of $300,000 for 20X1. What amount should Pare report in its December 31, 20X1, balance sheet as investment in Tot?A. $170,000
B. $200,000
C. $230,000
D. $290,000

Answer 1

Answer:

C) $230,000

Explanation:

Since Pare has significant influence over Tot (it owns 30% of its stock), it must record the transactions using the equity method. Pare purchased the extra 20% of stocks on December 31, so it will only report dividends for the original 10%.

total ownership:

100,000 stocks x 10% = 10,000 stocks at $50,000

20,000 stocks at $150,000

total 30,000 stocks (30%) at $200,000

earning's share (using equity method):

$300,000 x 10% = $30,000

total investment account = $200,000 + $30,000 = $230,000