ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area II: Technical Accounting
Company X owns 30% of Company Y and exercises significant influence. In Year 1, Company Y reported net income of $100,000 and paid dividends of $20,000. Under the equity method, what is the impact on Company X's Investment account?
Company X owns 30% of Company Y and exercises significant influence. In Year 1, Company Y reported net income of $100,000 and paid dividends of $20,000. Under the equity method, what is the impact on Company X's Investment account?
Answer options:
A.
Increase by $30,000
B.
Increase by $24,000
C.
Increase by $6,000
D.
No change
How to approach this question
Equity Method: Investment = Cost + %Income - %Dividends. Income increases investment; Dividends decrease investment (return of capital).
Full Answer
B.Increase by $24,000✓ Correct
B
Under the equity method (ASC 323), the investor records its share of the investee's earnings as an increase to the investment account ($100,000 × 30% = $30,000). Dividends received are treated as a return of investment and reduce the investment account ($20,000 × 30% = $6,000). Net change = +$30,000 - $6,000 = +$24,000.
Common mistakes
Treating dividends as income (Fair Value method); ignoring dividends.
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