Question

On January 2, 2015 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. And subsequently used the equity method to account for the investment. During 2015 Jobs, Inc. Reported net income of $840,000 and distributed dividends of $360,000. The ending balance in the Investment in Pod Company account at December 31, 2015 was $640,000 after applying the equity method during 2015. What was the purchase price Pod Company paid for its investment in Jobs, Inc?

Answer 1

We are given the following information:

- On January 2, 2015, Pod Company purchased 25% of the outstanding common stock of Jobs, Inc.

- Pod Company used the equity method to account for the investment in Jobs, Inc.

- During 2015, Jobs, Inc. reported net income of $840,000 and distributed dividends of $360,000.

- At December 31, 2015, the balance in Pod Company's Investment in Jobs, Inc. account was $640,000 after applying the equity method during 2015.

Under the equity method, the investor's share of investee income increases the investment account balance, while dividends received reduce it.

So in this case, Pod Company's share of Jobs Inc.'s net income of $840,000 (since Pod Company owns 25%, its share is 25% * $840,000 = $210,000) would increase the investment account. Then the $360,000 dividend received would reduce it.

This gives us:

Initial investment amount + $210,000 income share - $360,000 dividends received = $640,000 ending balance

Solving for the initial investment amount:

$640,000 ending balance + $360,000 dividends - $210,000 income share = Initial investment amount

$640,000 + $360,000 - $210,000 = $790,000

So the purchase price Pod Company paid for its investment in Jobs, Inc was $790,000.