On January 1, 20X2, Pullman Company acquired 30 percent of Skate Company's common stock, at underlying book value of $100,000. Skate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. Skate reported net income of $150,000 for 20X2 and paid total dividends of $72,000. Pullman uses the equity method to account for this investment.

 On January 1, 20X2, Pullman Company acquired 30 percent of Skate Company's common stock, at underlying book value of $100,000. Skate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. Skate reported net income of $150,000 for 20X2 and paid total dividends of $72,000. Pullman uses the equity method to account for this investment.

Based on the preceding information, what amount would be reported by Pullman Company as the balance in its investment account on December 31, 20X2?

Multiple Choice

$100,000


$123,400 Correct

$120,400


$142,000

Explanation
$123,400 is correct. The investment in Skate account uses the equity method to calculate its ending balance on December 31, 20X2 as follows: initial investment $100,000 + share of net income $42,000 − share of dividends $18,600 = $123,400.

$100,000 is incorrect. $100,000 is Pullman Company’s initial investment. The question asks for the balance in Pullman Company’s investment account at year-end.

$120,400 is incorrect. This answer choice incorrectly uses $21,600 as the amount of Pullman Company’s share of dividends instead of $18,600.

$142,000 is incorrect. This answer choice does not subtract Pullman Company’s $18,600 share of dividends.