Question

Lee, Inc. acquired 30% of Polk Corp's voting stock on January 1 , year 1 , for $100,000. During year 1, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During year 2. Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1 . On July 1, year 2, Lee sold half of its stock in Polk for $66,000 cash. The carrying amount of this investment in Lee's December 31, year 1 Balance Sheet should be a) $112,000. b) $115,000, c) $104,500. d) $100,000.

Answer 1

c) $104,500 - The carrying amount of Lee, Inc.'s investment in Polk Corp on December 31, year 1, considering the initial investment, Lee's share of earnings, and dividends, and adjusted for the subsequent sale of half the stock.

Step-by-step explanation:

Lee, Inc. acquired 30% of Polk Corp's voting stock on January 1, year 1, for $100,000. The investment account on Lee's December 31, year 1, Balance Sheet is determined by adding the initial investment and Lee's share of Polk's earnings, while subtracting Lee's share of Polk's dividends.

Initial investment: $100,000

Lee's share of Polk's year 1 earnings (30% * $40,000): $12,000

Lee's share of Polk's year 1 dividends (30% * $25,000): -$7,500

Carrying amount on December 31, year 1: $104,500 (Initial investment + share of earnings - share of dividends)

During year 2, Polk earned $50,000. Lee's share (30% * $50,000): $15,000. Polk paid dividends of $15,000 on April 1 and $15,000 on October 1. Lee's share of dividends in year 2 (30% * $30,000): -$9,000.

Before selling half of its stock on July 1, year 2, Lee's carrying amount on June 30, year 2: $110,500 (Carrying amount on December 31, year 1 + share of year 2 earnings - share of year 2 dividends).

After selling half of its stock for $66,000, Lee's remaining investment is valued at $110,500 - $66,000 = $44,500.

Thus, the carrying amount on Lee's December 31, year 1, Balance Sheet is $44,500 for the remaining investment, and the final answer is $104,500 ($44,500 + $66,000).