On January 1, 2011, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2011, was $360,000. During 2011, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. Ignoring income taxes, Mets' statement of income for the year ended December 31, 2011, should include "Income From Investment in Pirates Corporation Stock" in the amount of

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Quizplus · Accepted Answer

Under the equity method, income from investment is recognized based on the investor's share of the investee's net income. Mets' share of Pirates' net income would be 30% x $360,000 = $108,000. Dividends received from the investee are treated as a reduction of the investment account and are not recognized as income. Therefore, there is no impact on Mets' statement of income. The calculation of goodwill is not relevant for purposes of determining Mets' income from the investment.