Question

Square Company purchases an equity investment in Tangle Company at a purchase price of $8 million, representing 40% of the book value of Tangle. During the current year, Tangle reports net income of $700,000 and pays cash dividends of $300,000. At the end of the year, the market value of Square's investment is $8.3 million. What amount of income does Square report relating to this investment in Tangle for the year?

Answer 1

The $280,000 is the income which square report in Tangle for the year.

Step-by-step explanation:

For computing the income relating to the investment in Tangle for the year, the net income and percentage is applied or we can say equity method is applied.

In mathematically,

Income = Net income × percentage

= $700,000 × 40%

=$280,000

All other cost like dividend, market value, purchase price is irrelevant while computing the investment income.

Hence, the $280,000 is the income which square report in Tangle for the year.