Respuesta :
Answer:
a. How much equity income should the investor report in its net income (i.e., as part of the current year income statement)?
- $280,000
b. What amount should the investor report for the Equity Investment in its balance sheet at the end of the year?
- $950,000
Explanation:
Since the investor company uses the equity method, the journal entry to record the purchase of the stock should be:
Dr Investment in XYZ company 750,000
Cr Cash 750,000
When the dividends are received, the following journal entry is made:
Dr Cash 80,000
Cr Investment in XYZ 80,000
At the end of the year, the investor must report:
Dr Investment in XYZ 280,000 (= $700,000 x 40%)
Cr Revenue on investment in XYZ 280,000
Dividends are not considered income when you use the equity method, they only reduce the value of the investment.
Value of the investment account = $750,000 - $80,000 + $280,000 = $950,000