Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Equity Method

Financial Accounting

7. Receivables and Investments

Equity Method

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Multiple Choice

On January 4, The Jones Company purchased 35,000 out of the 87,500 outstanding shares of Miller Company for $400,000. During the year, the Miller Company reported net income of $240,000 and paid cash dividends of $60,000, while the Jones Company reported net income of $450,000 and paid cash dividends of $80,000. What is the carrying value of Jones Company's investment in Miller Company at the end of the year under the equity method?

$400,000

$472,000

$496,000

None of the above

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Verified step by step guidance

Determine the percentage of ownership Jones Company has in Miller Company by dividing the number of shares purchased by the total outstanding shares: $ \frac{35,000}{87,500} $.

Since the ownership percentage is more than 20%, Jones Company should use the equity method to account for its investment in Miller Company.

Calculate Jones Company's share of Miller Company's net income by multiplying Miller's net income by the ownership percentage: $ 240,000 \times \frac{35,000}{87,500} $.

Calculate Jones Company's share of Miller Company's dividends by multiplying Miller's dividends by the ownership percentage: $ 60,000 \times \frac{35,000}{87,500} $.

Adjust the carrying value of the investment by adding the share of net income and subtracting the share of dividends from the initial investment cost: $ 400,000 + \text{(share of net income)} - \text{(share of dividends)} $.