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I am just wondering, what would be different if Larkin has 10% (instead of 25%) of Devon Co? i.e. no significant influence
Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin’s investment in Devon during the most recent year:
Carrying amount of Larkin’s investment in Devon
at the beginning of the year $200,000
Net income of Devon for the year 600,000
Total dividends paid to Devon’s stockholders
during the year 400,000
What is the carrying amount of Larkin’s investment in Devon at year-end?
A. $100,000
B. $200,000
C. $250,000
D. $350,000
C. When a company owns 20% or more of the voting stock of another corporation, the company is presumed to have significant influence over the decisions of the corporation, and is required to account for the investment in the other corporation using the equity method.
The equity method requires the investing company to recognize its share of the owned corporation’s earnings, and to increase the carrying amount of its stock in the owned corporation by the same amount.
When the investing corporation is paid dividends by the owned corporation, this is not income under the equity method, but it does lower the investment carrying amount.
The investing corporation’s initial price in buying the stock of the owned corporation is the carrying amount of the investment, and this is increased by the share of earnings and decreased by the share of dividends.
Thus, the carrying amount of Larkin’s investment in Devon at year-end is the beginning balance $200,000, plus 25% of the $600,000 Devon income, and minus 25% of the Devon dividends:
$200,000 + (0.25 × $600,000) – (0.25 × $400,000)
$200,000 + (0.25 x $600,000) – (0.25 x $400,000) =
$200,000 + $150,000 – $100,000 = $250,000
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