On January 1, 2010, Danforth Company purchased 30% of the common stock of Farley Company for $80, 000.The purchase was made at book value.Additional information for Farley Company follows: $2010$20,000$24,000201160,00042,000\begin{array}{rrr}\text { Year } & \text { Net Income } & \text { Dividends Paic }\\2010 & \$ 20,000 & \$ 24,000 \\2011 & 60,000 & 42,000\end{array}$
On Danforth's books, what would be the balance of Investment in Farley Company at December 31, 2011?

A) $104, 000
B) $ 63, 400
C) $ 84, 200
D) $ 60, 200

Question

On January 1, 2010, Danforth Company purchased 30% of the common stock of Farley Company for $80, 000.The purchase was made at book value.Additional information for Farley Company follows:

2010$20,000$24,000201160,00042,000\begin{array}{rrr}\text { Year } & \text { Net Income } & \text { Dividends Paic }\\2010 & \$ 20,000 & \$ 24,000 \\2011 & 60,000 & 42,000\end{array}

On Danforth's books, what would be the balance of Investment in Farley Company at December 31, 2011?

A) $104, 000
B) $ 63, 400
C) $ 84, 200
D) $ 60, 200

Rushil Irfan · Accepted Answer

Final Answer : C, Explanation :  Since the purchase was made at book value, the initial investment amount of $80,000 would be the same as Farley Company's book value at the time of purchase.To calculate the balance of Investment in Farley Company at December 31, 2011, we need to use the equity method, which requires us to adjust the initial investment each year based on Farley Company's net income and dividends.Based on the additional information provided, Farley Company had a net income of $72,000 in 2010 and $84,000 in 2011.Since Danforth Company owns 30% of Farley Company, its share of net income each year would be:2010: 30% x $72,000 = $21,6002011: 30% x $84,000 = $25,200Farley Company paid dividends of $24,000 in 2010 and $30,000 in 2011.The balance of Investment in Farley Company at December 31, 2011 would be:Initial investment: $80,000Add: Share of net income in 2010: $21,600Add: Share of net income in 2011: $25,200Less: Dividends received in 2010: $24,000Less: Dividends received in 2011: $30,000Balance at December 31, 2011: $84,200

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