Grant, Inc. (Grant) acquired 30% of South Co.'s (South) voting stock, for $200,000, on January 1,...

Question:

Grant, Inc. (Grant) acquired 30% of South Co.'s (South) voting stock, for $200,000, on January 1, 20X1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. On that date, South reported assets of $500,000 and liabilities of $100,000. South had equipment, with a book value of $60,000, that was actually worth $160,000. The equipment had a remaining useful life of five years. During 20X1, South reported net income of $80,000 and paid dividends of $50,000. What amount of income should Grant recognize, in 20X1, as a result of this investment?

Investment with significant influence

Investment with significant influence are accounted for using equity method. This methods treats dividends as a reduction in the investment balance aside from recognizing it as a revenue.

Answer and Explanation:

The amount of income is $180,000.

Net Income 80,000
Amortization of Undervalued equipment -20,000
Income 60,000
30%
Investment Income 18,000

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