Question

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000. The income reported by Jones for 2021 with regard to the Anderson investment is:_____.
a. $80,000.
b. $30,000.
c. $50,000.
d. $15,000.
e. $75,000.

Answer 1

The income reported by Jones for 2021 with regard to the Anderson investment is $80,000

In 2021 Jones changed the method from fair value to Equity method.

In the equity method Income reported is

= income of the company in which investment is made x capital share in that company

= $200,000 x 40%

= $80,000

Investing is dedicating an asset to achieve an increase in value over a period of time. Making an investment requires sacrificing your current assets such as time, money, and effort. In finance, the purpose of investment is to generate a return on the assets invested

The definition of investment is an asset that is purchased or invested to build wealth and save money from hard-earned income or capital appreciation.

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