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The Equity Method of Accounting for Investments

In January 2004, Wilkinson, Inc., acquired 20 percent of the outstanding common stock of Bremm, Inc., for $700,000. This investment gave Wilkinson the ability to exercise significant influence over Bremm. Bremm's assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years.

In 2004, Bremm reported net income of $170,000. In 2005, Bremm reported net income of $210,000. Dividends of $70,000 were paid in each of these two years. What is the reported balance of Wilkinson's Investment in Bremm at December 31, 2005?

a. $728,000.
b. $748,000.
c. $756,000.
d. $776,000.
e. None of the above.
f. Cannot determine answer with facts presented

Solution Preview

(b) is the right answer. Please see the rationale below.

Under the equity method, stock investments are valued at cost at the time of acquisition. Thereafter, equity shares in the investee's earnings are recognized as income to the owner and are added to the ...

Solution Summary

The solution explains in detail the multiple choice question related to the equity method for investments.