Asked by Jackson Lukens on Jun 29, 2024
Verified
On January 1 2017 Dumas Industries acquired a 18% interest in Arlongton Corporation through the purchase of 12000 shares of Arlongton Corporation common stock for $250000. During 2017 Arlongton Corp. paid $60000 in dividends and reported a net loss of $90000. Dumas is able to exert significant influence on Arlongton. However Dumas mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Dumas's investment using the equity method? Investment Net Account Earnings (loss) \begin{array}{l}&&\text { Investment Net }\\& \text { Account } & \text { Earnings (loss) } \\\end{array} Account Investment Net Earnings (loss)
A) $90,000($30,000)\begin{array}{l}& \$ 90,000 && ( \$ 30,000 ) \\\end{array}$90,000($30,000)
B) $223,000($16,200)\begin{array}{l}& \$ 223,000 && ( \$ 16,200 ) \\\end{array}$223,000($16,200)
C) $233,800($16,200)\begin{array}{l}& \$ 233,800 && ( \$ 16,200 ) \\\end{array}$233,800($16,200)
D) $233,800($5,400)\begin{array}{l} & \$ 233,800 && ( \$ 5,400 )\end{array}$233,800($5,400)
Cost Method
An investment accounting approach where the investment is recorded at cost and adjusted only for dividends received, not market value changes.
Equity Method
An accounting technique used by a company to record its investment in another company based on the equity it holds in that company.
Net Earnings
Net earnings represent the amount of profit left over after all expenses, taxes, and costs have been subtracted from total revenue.
- Ascertain the correct accounting technique, cost or equity, depending on the extent of ownership and control.
- Assess how transactions in stocks (acquisitions, disposals, and dividends) influence an investor's accounting statements.
Verified Answer
BR
Learning Objectives
- Ascertain the correct accounting technique, cost or equity, depending on the extent of ownership and control.
- Assess how transactions in stocks (acquisitions, disposals, and dividends) influence an investor's accounting statements.