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On January 1, 2020, Marvel Company purchased an investment in Stark Industries for $5 million, representing 35% of the book value of Stark Industries. During the year, Stark reported net income of $1,200,000 and pays cash dividends of $100,000. At the end of the year, the fair value of Marvel’s investment is $5.4 million. Required At what amount is the investment reported on Marvel’s balance sheet at year-end? What amount of income from investments does Marvel report? Prepare journal entries to record the transactions for Marvel Company.

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Answer:

1. Investment at beginning               $5,000,000

Add: Net Income  (1200000*35%)   $420,000

Less: Dividend (100000*35%)          $35,000    

Investment at year end                   $5,385,000

2. Amount of Income from Investment = $1,200,000*35% = $420,000

3. Journal entries to record transactions

 Particulars                                Debit         Credit

Investment in Marvel Co.      $420,000

       Equity Income                                      $420,000

(Recording receipt of net income)

Cash                                         $35,000

       Investment in Marvel Co                     $35,000

( Recording receipt of dividend)