Question

TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $500,000. This acquisition gives TunaCo the ability to apply significant influence to Stanley's operating and financing policies and TunaCo elects to use the equity method of accounting. Stanley reports assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life has a book value of $100,000 and a fair market value of $400,000. During the current year, Stanley, Inc. reports net income of $140,000, while paying out dividends of $70,000 for the year. What is the Investment in Stanley account balance in TunaCo's accounting records at the end of the current year?

Answer 1

$512,500

Step-by-step explanation:

Data provided in the question:

Percentage of Stanley, Inc purchased by TunaCo = 25%

Amount for which the TunaCo purchased = $500,000

Assets on Stanley = $160,000

Liabilities of Stanley = $400,000

Useful life of building = 15 years

Book value of the building = $100,000

Fair market value = $400,000

Net income reported by Stanley = $140,000

Dividend paid = $70,000

Now,

Annual depreciation = [Fair value - Book value] ÷ Useful life

= [ $400,000 - $100,000] ÷ 15

= 20,000

Now,

Total account balance of Stanley = Net income reported by Stanley - Annual depreciation - Dividend paid

= $140,000 - $20,000 - $70,000

= $50,000

Account balance of TunaCo = Initial investment + 25% of account balance of Stanley

= $500,000 + [ 25% of $50,000]

= $500,000 + $12,500

= $512,500