Pencil Company purchased 40 percent ownership of Stylus Corporation on January 1, 20X1, for $150,000. Stylus’s balance sheet at the time of acquisition was as follows:

During 20X1, Stylus Corporation reported net income of $30,000 and paid dividends of $9,000. The fair values of Stylus’s assets and liabilities were equal to their book values at the date of acquisition, with the exception of buildings and equipment, which had a fair value $35,000 above book value. All buildings and equipment had remaining lives of five years at the time of the business combination. The amount attributed to goodwill as a result of its purchase of Stylus shares is not impaired.

Required

a. What amount of investment income will Pencil Company record during 20X1 under equity-method accounting?

b. What amount of income will be reported under the cost method?

c. What will be the balance in the investment account on December 31, 20X1, under 

(1) Cost-method

(2) Equity-method accounting?

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Cash Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Total Assets STYLUS CORPORATION Balance Sheet January 1, 20X1 $300,000 (120,000) $ 30,000 120,000 80,000 150,000 180,000 $560,000 Current Liabilities Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities & Equities $ 40,000 200,000 200,000 40,000 80,000 $560,000