On 1 January 2016,Yu Ltd acquired 100 000 shares (30 per cent of the voting interest)in Ping Ltd for $900 000 cash.On 30 June 2016,Ping Ltd announced its earnings per share for the first six months of 2016 at $2.00 per share.On 20 November,Ping Ltd paid dividends to shareholders at $1.20 per share.On 31 December 2016,Ping Ltd announced its earnings per share for 2016 at $3.50 per share (i.e. ,$1.50 additional since 30 June).
-If Yu Ltd used the equity method,what would have been the impact of Ping Ltd's 31 December 2016 earnings announcement?
A) Investment in Ping Ltd would have increased by $150 000.
B) Dividend revenue would have increased by $150 000.
C) Investment in Ping Ltd would have increased by $150 000 and dividend revenue would have increased by $150 000.
D) There would be no impact.

Question

Quizplus · Accepted Answer

Under the equity method, an investor recognizes its share of the profits or losses of the investee in the period in which they occur. Yu Ltd owns 30% of Ping Ltd, so it would recognize 30% of Ping Ltd's additional earnings of $1.50 per share for the second half of the year. With 100,000 shares, this equates to 100,000 shares * $1.50 * 30% = $45,000, not $150,000 as stated in the options. However, given the choices provided and the context of the question, it seems there might be a misunderstanding in the calculation or the options presented. Typically, the correct action would be to adjust the investment in Ping Ltd by Yu Ltd's share of Ping Ltd's earnings, not to increase dividend revenue (which is based on actual dividends received, not on the investee's earnings). Since none of the options accurately reflect the correct calculation based on the information provided, and assuming a potential error in the question or choices, the closest option to what would conceptually happen (ignoring the numerical discrepancy) is that the investment in Ping Ltd would increase, but not by the amount stated.

On 1 January 2016,Yu Ltd Acquired 100 000 Shares (30