Question

Assume that, on January 1, 2013, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at January 1, 2013. The following information pertains to Yankee during 2013:

Net Income: $200000
Dividends: $60000
MKT price: $22/share

What amount would Matsui report in its year-end 2013 balance sheet for its investment in Yankee?

Answer 1

Matsui would report $1,242,000 in its year-end 2013 balance sheet for its investment in Yankee.

Step-by-step explanation:

To determine the amount Matsui would report in its year-end 2013 balance sheet for its investment in Yankee, we need to consider the equity method of accounting. According to the equity method, an investor initially records its investment at cost and adjusts the investment for its share of the investee's net income or loss and dividends.

In this case, Matsui purchased 60,000 shares of Yankee when the total shares issued were 200,000. This means Matsui owns 30% of Yankee's shares (60,000/200,000).

The net income of Yankee for 2013 was $200,000, and the dividends paid were $60,000. Therefore, Matsui's share of net income would be $200,000 * 0.30 = $60,000, and the share of dividends would be $60,000 * 0.30 = $18,000.

To calculate the year-end balance, we start with the initial investment of $1,200,000 and add the share of net income ($60,000) and deduct the share of dividends ($18,000). The amount Matsui would report in its year-end 2013 balance sheet for its investment in Yankee is $1,242,000 ($1,200,000 + $60,000 - $18,000).