Review Qu. 119, Ch 12

Mr. Mercury, Inc. bought 25% of Hermes Corp.s outstanding common stock on January 2, 2018, for $500,000. The carrying amount of Hermes net assets at the purchase date totaled $1,500,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $80,000 and $40,000, respectively. The plant has a ten-year life. All inventory was sold during 2018. During 2018, Hermes reported net income of $200,000 and paid a $20,000 cash dividend. There is no impairment of goodwill during 2018. Assume that Mr. Mercury uses the equity method to account for this investment. What amount should Mr. Mercury report in its income statement from its investment in Hermes for the year ended December 31, 2018?

Multiple Choice

• $42,000

• $37,000

• $38,000