Question

On January 2, 2018 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2018 Jobs, Inc. reported net income of $1,260,000 and distributed dividends of $540,000. The ending balance in the Investment in Pod Company account at December 31, 2018 was $960,000 after applying the equity method during 2018. What was the purchase price Pod Company paid for its investment in Jobs, Inc

Answer 1

Answer:

$780,000

Explanation:

using the equity method, the ending balance in the Investment in Pod Company account = purchase price + [(net income - distributed dividends) x 25%]

• ending balance = $960,000
• net income = $1,260,000
• distributed dividends = $540,000
• purchase price = ???

$960,000 = purchase price + [($1,260,000 - $540,000) x 25%]

$960,000 = purchase price + ($720,000 x 25%)

$960,000 = purchase price + $180,000

purchase price = $960,000 - $180,000 = $780,000