[jessanqi]

Hi, should the below $ 48,000 common stock dividend be the cash dividend instead for this question? since based on my understanding, cash dividend received on equity method would be the reduction of investment. should we treat the stock dividend the same way?

Please help & thank you in advance!

On January 1, 2016, Miller Company purchased 25% of Wall Corporation’s common stock. Miller appropriately carries this investment at equity and the balance in Miller’s investment account was $190,000 at December 31, 2016. Wall reported net income of $120,000 for the year ended December 31, 2016, and paid common stock dividends totaling $48,000 during 2016. Miller did not elect the fair value option. How much did Miller pay for its 25% interest in Wall?

A. $172,000
B. $202,000
C. $208,000
D. $232,000

Explanation
The correct answer is A. The key to this question is an understanding of the manner in which earnings and dividends are accounted for under the “equity” method. Under this method, earnings of an investee increase the carrying amount of the investment and dividends received from an investee reduce the carrying amount of an investment. In this situation, we are given that the carrying amount of the investment at December 31, 2016 was $190,000. Therefore, we must eliminate the adjustments that were made to the investment account during 2016 (which brought the balance to $190,000) in order to determine the cost of the investment to Miller at January 1, 2016.
Balance, investment account 12/31/16 $190,000
Less: Earnings added to investment account 25% × $120,000 $(30,000)

$160,000
Add: Dividends deducted from investment account: 25% × $48,000 $12,000
Cost of investment $172,000

[jessanqi]

can anyone help???

[CoachEmUp]

You're reading the question wrong. It is a Common Stock, pause, dividend. Not a Common, pause, stock dividend.

When it comes to equity method accounting I haven't seen a stock dividend problem, but my assumption is it would be accounted for the same way as a normal stock dividend (there wouldn't be any adjustments for the receiver of a stock dividend… they hold the same portion of ownership of the company as before).

[Mike J]

For equity method, T-accounts are your friend.

In general, if you can solve for x, you have an excellent shot at passing FAR. We do this with journal entries but with Equity Method, A/R or Installment Method Questions can help you derive the answer.

So, setup the T-account for Investment in Wall and solve for x.

[jessanqi]

Thank you guys for the help! I'm really appreciated!!

[Author]

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