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Square Company purchases an equity investment in Tangle Company at a purchase price of 88 million, representing 40% of the book value of Tangle
Square Company purchases an equity investment in Tangle Company at a purchase price of 88 million, representing 40% of the book value of Tangle. During the current year, Tangle reports net income of $700,000 and pays cash dividends of $300,000. At the end of the year, the market value of Square's investment is $8.3 million.
What amount of income does Square report relating to this investment in Tangle for the year?
a. $240,000 b. $120,000 c. $280,000 d. $300,000
Expert Solution
Computation of Amount of income Square reports relating to this investment in Tangle for the year:
As 40% shares of tangle company was acquired by Square Company, therefore square company is having significant influence in tangle company and equity method will be applied for accounting for investment.
So, Amount of income Square reports relating to this investment in Tangle for the year = 40% of Tangle's Net Income
= $700,000*40%
Amount of income Square reports relating to this investment in Tangle for the year = $280,000.
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