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On February 5, 2020, Apple Inc. purchased 12% of Pear Inc.’s common stock for $50,000. Pear’s...

On February 5, 2020, Apple Inc. purchased 12% of Pear Inc.’s common stock for $50,000. Pear’s net income for the years ended December 31, 2020, and December 31, 2021, were $10,000 and $50,000, respectively. Pear did not pay any dividends in 2020. Pear declared and paid a dividend of $60,000 to all its shareholders in 2021. The fair value of the Pear stock owned by Apple Inc. is valued at $70,000 and $130,000 on December 31, 2020 and December 31, 2021, respectively. How much should Apple Inc. show in the 2020 income statement as income from this investment?

a.

$7,200
b.

$70,000
c.

$20,000
d.

$10,000
e.

None of these choices is correct.
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Answer #1

Answer: c.$20,000

Explanation:

Cost method is applicable as percentage of acquisition is 12% and no significant influence.

Year 2020
Fair value of the Equity investment in Pear Inc. $70,000
Equity investment in Pear Inc. at Cost $50,000
Investment income $20,000
Add: Dividend revenue [No dividend declared in 2020] $0
Total investment income $20,000

Therefore, $20,000 to be shown income statement as income from investments.

Thus, Option c is correct and remaining options are incorrect.

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