Question

On January 1, 2018, Ramsey Company purchased 35% of the outstanding common shares of the Vapor Company for $70,000 when the net assets were $200,000. During 2018, Vapor Company earned $80,000 and declared a dividend of $40,000. Ramsey accounted for the investment using the equity method. Ramsey’s share of Vapor’s income for 2018 is:

A. $42,000
B. $28,000
C. $14,000
D. $40,000

Answer 1

Answer: Investment income = Earning during 2018 × outstanding common shares

= $80,000 × 35%

Dividend declaration = Dividend × outstanding common shares

= $40,000 × 35%

Ramsey’s share of Vapor’s income for 2018 = Investment income - Dividend declaration

= $28,000 - $14,000

= $14,000