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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. 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
Expert Solution
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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