North Company has supplied you with information regarding two investments that were made during 20X5 as follows:
1. On January 1, 20X5, North purchased for cash 40% of the 500,000 shares of voting common shares of Young Company for $ 2,800,000, representing 40% of the net worth of Young. The carrying value of Young’s net assets was $ 6,000,000 on January 1, 20X5, and this amount approximated the fair value of the net assets. Young’s net income for the year ended
December 31, 20X5, was $ 900,000. Young paid dividends of $ 0.80 per share in 20X5. The market value of Young’s common shares was $ 15 per share on December 31, 20X5. North exercised significant influence over the operating and financial policies of Young.
2. On July 1, 20X5, North purchased for cash 20,000 shares representing 5% of the voting common shares of the Mak Company for $ 500,000. Mak’s net income for the six months ended December 31, 20X5, was $ 400,000, and for the year ended December 31, 20X5, it was $ 650,000. Mak paid dividends of $ 0.40 per share each quarter during 20X5 to share-holders of record on the last day of each quarter. The market value of Mak’s common shares was $ 30 per share on January 1, 20X5, and $ 35 per share on December 31, 20X5.
As a result of these two investments, determine the following:
1. What should be the balance in the investment account for North at December 31, 20X5?
2. What should be the investment income reported by North for the year ended December 31, 20X5?
Show all supporting calculations. The equity method of recording investments is used when appropriate for reporting purposes.