Jet Inc.owns a 25% interest in the shares of Winnipeg Corp.During the year, Winnipeg pays $5,000 in dividends to Jet and reports a net loss of $50,000.Jet's investment in Winnipeg will affect Jet's profit by
A)$5,000 increase.
B)$1,000 increase.
C)$12,500 decrease.
D)$11,250 decrease.

Question

Quizplus · Accepted Answer

Jet Inc. owns a 25% interest in Winnipeg Corp., which means it uses the equity method to account for its investment. Under the equity method, Jet's share of Winnipeg's net loss is 25% of $50,000, which is $12,500. Dividends received do not affect profit under the equity method; they reduce the carrying amount of the investment. Therefore, Jet's profit is decreased by $12,500.

Jet IncOwns a 25% Interest in the Shares of Winnipeg Corp