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Practice CPA®CPA FAR Practice Exam 4Question 25

Medium1 markMultiple Choice

Area II: Balance Sheet AccountsFARInvestmentsEquity Method

CPA · Question 25 · Area II: Balance Sheet Accounts

Investor Co. owns 30% of Investee Co. and has significant influence. <br/>Jan 1 Investment Balance: $200,000<br/>Investee Net Income: $100,000<br/>Investee Dividends Paid: $40,000<br/><br/>What is the December 31 Investment Balance?

Answer options:

A.

$260,000

B.

$218,000

C.

$230,000

D.

$200,000

How to approach this question

Equity Method Rollforward: Beg Balance + % Share of NI - % Share of Dividends = End Balance.

Full Answer

B.$218,000✓ Correct

Beg Balance: $200,000<br/>+ Share of Income: $100,000 * 30% = $30,000<br/>- Share of Dividends: $40,000 * 30% = ($12,000)<br/>End Balance: $218,000.

Common mistakes

Treating dividends as income; forgetting to apply the ownership percentage.

Question 24 All questions Question 26

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