On January 1, 20X2 Pathlon Company acquired 30 percent of the common stock of Sopteron Corporation, at underlying book value. For the same year, Sopteron reported net income of $55,000, which includes a gain from discontinued operations of $40,000. Sopteron did not pay any dividends during the year. By what amount would Pathlon's investment in Sopteron Corporation increase for the year, if Pathlon used the equity method?

 On January 1, 20X2 Pathlon Company acquired 30 percent of the common stock of Sopteron Corporation, at underlying book value. For the same year, Sopteron reported net income of $55,000, which includes a gain from discontinued operations of $40,000. Sopteron did not pay any dividends during the year. By what amount would Pathlon's investment in Sopteron Corporation increase for the year, if Pathlon used the equity method?

Multiple Choice

$0


$16,500 Correct

$4,500


$12,000

Explanation
$16,500 is correct. $55,000 × 30 percent = $16,500. Under the equity method, income from Sopteron increases Pathlon’s investment account and income from Sopteron account by $16,500 ($55,000 × 30 percent).

$12,000 is incorrect. This answer choice incorrectly multiplies $40,000 by 30 percent instead of $55,000.