An investor company owns 40% of the outstanding common stock of an investee company, which allows the investor to exercise significant influence over the investee. The Equity Investment was reported at $750,000 as of the end of the previous year. During the year, the investor received dividends of $80,000 from the investee. The investee reports the following income statement for the year:Revenues - $2,400,000 Expenses - 1,800,000 Net income - 600,000 Other comprehensive income - 100,000 Comprehensive income - $700,000 a. How much equity income should the investor report in its net income (i. e., as part of the current year income statement)? $ 0 b. What amount should the investor report for the Equity Investment in its balance sheet at the end of the year? $ 0

a. How much equity income should the investor report in its net income (i.e., as part of the current year income statement)?

b. What amount should the investor report for the Equity Investment in its balance sheet at the end of the year?

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

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