Question

Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlying book value. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon's investment in Opteron Corporation increase for the year, if Athlon used the equity method

Answer 1

$16,500

Step-by-step explanation:

The computation of increase in investment is shown below:-

Here, if the investor holds 20% or more but less than 50% shares than the dividend paid and income earned by the investee are reported.

Increase in investment = Shares of net income - Share of dividends

= $55,000 × 30% - $0 (Dividend is not paid)

= $16,500

Therefore for computing the increase in investment under equity method we simply applied the above formula.