Question

On July 1, 2021, Tremen Corporation acquired 25% of the shares of Delany Company. Tremen paid $3,090,000 for the investment, and that amount is exactly equal to 25% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,300,000 for 2021, and paid $180,000 of dividends each quarter to its shareholders. After all closing entries are made for the year ended December 31, 2021, Tremen's "Investment in Delany Company" account would have a balance of:

Answer 1

The tremen's investment in Delany company is $3,162,500

Step-by-step explanation:

Tremen's investment in Delany Company account would be as follows at year ended 31st December 2021

Initial investment value $3,090,000

Delany's net income $1,300,000

Dividends paid(4*$180,000) ($720,000)

Profits after dividends $580,000

Tremen's share 25%*$580,000*6/12 $72,500

year end balance of Tremen's investment $3,162,500

First of all, the total dividends is taken away from net income and a portion of the net income after dividend payment is added to Tremen's investment which reflects its percentage shareholding and the duration of investment of six months