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On January 1st 2016 Froto Co. acquired all of the common stock of Bilbo Company. In 2016, Bilbo earned net income of $360,000 and paid dividends of $190,000. Excess depreciation on Bilbo’s equipment was $6000.
How much difference would there be in Froto’s income with regard to the investment in Bilbo between using the equity method or using the cost method?
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Question & Answer: On January 1st 2016 Froto Co. acquired all of the common stock of Bilbo Company. In 2016, Bilbo earne…..
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Question 3 options:
| 190000 | |
| 360000 | |
| 354000 | |
| 164000 |
Expert Answer
| As per equity method income is | |
| Net Income (360000*100%) | 360000 |
| Less: excess depreciation | -6000 |
| Income from investment in Bilbo | 354000 |
| As per cost method income included dividend | |
| income | |
| Dividend income | 190000 |
| Difference in income | 164000 |
| 354000-190000 | |
| Option D is correct $164000 | |
