On January 2,Year 1,Barber Company purchased 5,000 shares of Convell Company for $60,500.Convell Company has a total of 25,000 shares of common stock outstanding and it is presumed the Barber Company will have a significant influence over Convell.During each of the next two years,Convell declared and paid cash dividends of $0.85 per share,and its net income was $72,000 and $67,000 for Year 1 and Year 2,respectively.What is the book value of Barber's investment in Convell at the end of Year 2?

A) $60,500.
B) $79,800.
C) $52,000.
D) $88,300.
E) $87,300.

Question

Janet Lopez · Accepted Answer

Final Answer : B, Explanation :  First, we need to calculate the share of net income received by Barber Company in each of the two years:Year 1: (5,000 shares / 25,000 shares) x $72,000 = $14,400Year 2: (5,000 shares / 25,000 shares) x $67,000 = $13,400Next, we need to adjust the investment for the dividends received:Year 1: $60,500 + ($0.85 x 5,000 shares) = $64,250Year 2: $64,250 + ($0.85 x 5,000 shares) = $67,000Finally, we can calculate the book value of the investment at the end of Year 2:$67,000 + Barber's share of Year 2 net income ($13,400) - Year 1 and Year 2 dividends received ($0.85 x 5,000 shares x 2) = $79,800. Therefore, the correct answer is B).

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