Asked by Rebika Basnet on Jun 08, 2024
Verified
Refer to Exhibit 15-1.Circle should report the investment in Birch Company on its December 31, 2010, balance sheet at
A) $ 900, 000
B) $ 980, 000
C) $ 940, 000
D) $1, 020, 000
Outstanding Common Stock
Refers to the shares of a corporation that have been issued and are currently owned by investors, including public shareholders and company insiders, but excluding shares owned by the corporation itself.
Cash Dividend
A distribution of a company's earnings to its shareholders in the form of cash.
Balance Sheet
A financial statement that summarizes a company's financial position at a certain point in time, including assets, liabilities, and shareholders' equity.
- Absorb and use the equity method in the financial accounting of investments.
Verified Answer
AR
Amanda RowenJun 15, 2024
Final Answer :
B
Explanation :
Circle Corporation should use the equity method to account for its investment in Birch Company because it owns 40% of Birch's common stock, which typically provides significant influence over the investee. Under the equity method, Circle would initially record the investment at cost ($900,000) and subsequently adjust the carrying amount of the investment to recognize its share of Birch's earnings and dividends. Birch reported income of $300,000 for the year. Circle's 40% share of Birch's income is $120,000 ($300,000 * 40%). Circle would increase the carrying amount of its investment by this amount. Birch paid dividends of $100,000, of which Circle's 40% share is $40,000. Circle would decrease the carrying amount of its investment by this amount. Therefore, the investment would be reported at $980,000 ($900,000 + $120,000 - $40,000) on Circle's December 31, 2010, balance sheet.
Learning Objectives
- Absorb and use the equity method in the financial accounting of investments.