Question

On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount of investment income will William Company report from its investment in eGate for the year?$45,000$42,000$62,000$35,000

Answer 1

The answer is $42,000

Step-by-step explanation:

William Company's Investment will be 30 percent of eGate shares.

William company holds a non-controlling interest in eGates since the percentage holding is less than 50 percent

Share of net income is $45,000(30 percent of $150,000)

Preferred stock is 5 percent on 100,000 shares at $2 par value is $10,000

William company share out of the $10,000 is $3,000(30 percent of $10,000)

Therefore its total Investment in eGate is $42,000($45,000 - $3,000)