Question

Frankfort Corporation purchases an investment in Bradley, Inc. at a purchase price of $9.8 million cash, representing 40% (at book value) of Bradley. During the year, Bradley reports net income of $1,680,000 and pays $413,000 of cash dividends. At the end of the year, the market value of Frankfort’s investment is $11.9 million. What amount of equity earnings would be reported by Frankfort Corporation? A. $165,000 B. $672,000 C. $507,000 D. $1,267,000 E. None of the above

Answer 1

Answer:

The correct answer is B

Explanation:

The amount of equity earnings will be computed as:

Amount of earnings = Frankfort share in net Income of Bradley × Bradley Net Income

where

Frankfort share is 40%

Net Income of Bradley amounts to $1,680,000

Putting the values above in the amount of earnings:

= 40% share × $1,680,000

= $672,000

Therefore, the option B is correct.