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On January 2, Matthews Corporation acquired 20% of the outstanding common stock of Dernier Company for $700,000. For the year ended December 31, Dernier reported net income of $180,000 and paid cash dividends of $60,000 on its common stock. At December 31, the carrying value of Matthews' investment in Dernier under the equity method is:

a. $688,000.
b. $700,000.
c. $712,000.
d. $724,000.

Respuesta :

TomShelby

Answer:

d. $724,000.

Explanation:

                             700,000 investment on Dernier for 20% equity

180,000 x 20% =   36,000 proportional participation on Income

60,000  x 20% =   (12,000) proportional payment of dividends

Net equity           724,000

under equity method we increase/decrease the percentage of the net income/loss As we participate in the desition making process to arrive it.

We decrease the cash payment as we are paying ourselve As we decide or have influence on the declaration adn distribution of the dividends

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