Johnstone Company owns 10,000 shares of Breva Corporation’s stock; Breva currently has
40,000 shares outstanding. During the year, Breva had net income of $200,000 and paid
$160,000 in dividends. At the beginning of the year, there was a balance of $150,000 in
Johnstone’s equity method investment in Breva Corporation account. At the end of the year,
the balance in this account should be

Answer (C) is correct.
Johnstone holds 25% (10,000 / 40,000) of Breva’s voting common
stock. Under the equity method, (1) an investor recognizes its share of
the investee’s net income as an increase in the investment account:
Investment in Breva ($200,000 x 25%) $50,000
Income -- equity-method investee $50,000
(2) a dividend from the investee is treated as a return of an investment:
Cash ($160,000 x 25%) $40,000
Investment in Breva $40,000
Thus, at the end of the year, the balance in the investment in Breva
account is $160,000 ($150,000 + $50,000 - $40,000).