Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will
account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,300,000. What is the balance in the Investment in Carly account at year end?
A) $5,087,500
B) $5,037,500
C) $5,062,500
D) $3,887,500
Answer: C
Explanation: C) Proportion of Ownership = 500,000 / 1,000,000 = 50%
Share of Dividends = $125,000 × 50% = $62,500
Share of Net Income = $1,300,000 × 50% = $650,000
Share of Additional Depreciation Expense =
($10,000,000 - 9,500,000) / 10 = $50,000 × 50% = $25,000
Investment Balance = $4,500,000 - 62,500 + 650,000 - 25,000
= $5,062,500
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