On January 1,2019,Turtle Inc.bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000.Turtle uses the equity method of accounting for this investment.During 2019,Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends.At the end of 2019,the shares had a fair value of $160,000.
-How much investment income will Turtle report for equity in investee earnings during 2019?
A)$12,000.
B)$22,000.
C)$10,500.
D)$1,500.

Question

On January 1,2019,Turtle Inc.bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000.Turtle uses the equity method of accounting for this investment.During 2019,Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends.At the end of 2019,the shares had a fair value of $160,000. 
-How much investment income will Turtle report for equity in investee earnings during 2019?
A)$12,000.
B)$22,000.
C)$10,500.
D)$1,500.

Quizplus · Accepted Answer

Under the equity method, Turtle Inc. would recognize its share of Shell Corporation's net income, not the dividends received or changes in fair value. Turtle owns 30% of Shell, so it would report 30% of Shell's $40,000 net income, which is $12,000.