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Homework answers / question archive / Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc

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Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2015, Taylor earns $1,200,000 and pays cash dividends of $1,000,000.

If the beginning balance in the investment account was $625,000. the balance at December 31, 2015, should be

A. $1,025,000

B. $825,000

C. $705,000

D. $625,000

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The answer is C. $705,000

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor Inc. Therefore,

Percentage of shareholding by Harrison Company = 20,000/50, 000 x 100 = 40%

Since the shareholding is more than 20%, the investor is said to have significant influence over Taylor Inc. Therefore, Harrison Company uses Equity Method to account for its investment in Taylor Inc.

Share of net income of Taylor Inc. = $1,200,000 x 40% = $480,000

Dividend Received = $1,000,000 x 40% = $400,000

 

Beginning balance in investment account $625,000
Add: Share of net income of Taylor Inc. $480,000
Less: Dividend Received $400,000
Investment balance on Dec 31, 2015 $705,000

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