Evil Ltd acquired 20% of and significant influence over the operations of Electric Ltd on 1 July 20X0.At that date the equity of Electric Ltd comprised retained profits of $800 000 and paid up capital of $3 000 000.During the financial year ended 30 June 20X1, Electric Ltd declared and paid a dividend of $200 000 out of profits earned to 30 June 20X0 and declared a final dividend of $300 000 out of profits earned in the year ended 30 June 20X1.Evil Ltd does not control any entities.What is the journal entry to record these dividends for Evil Ltd for the year ended 30 June 20X1 using the equity method?
A)$\begin{array} { l r c }
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Dividend receivable } & 200000 & \
\text { Dividend revenue } & & 200000 \
\begin{array} { l }
\text { Bank } \
\text { Investment in Electric }
\end{array} & 300000 & \
& & 300000
\end{array}$
B)$\begin{array} { l c c }
\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \
\text { Dividend receivable } & 200000 & \
\text { Bank } & 300000 & \
\text { Dividend revenue } & & 500000
\end{array}$
C)$\begin{array} { l r r }
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Dividend receivable } & 60000 & \
\text { Bank } & 40000 & \
\text { Investment in Electric } & & 100000
\end{array}$
D)$\begin{array} { l r r }
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Dividend receivable } & 40000 & \
\text { Bank } & 60000 & \
\text { Dividend revenue } & & 100000
\end{array}$

Question

Evil Ltd acquired 20% of and significant influence over the operations of Electric Ltd on 1 July 20X0.At that date the equity of Electric Ltd comprised retained profits of $800 000 and paid up capital of $3 000 000.During the financial year ended 30 June 20X1, Electric Ltd declared and paid a dividend of $200 000 out of profits earned to 30 June 20X0 and declared a final dividend of $300 000 out of profits earned in the year ended 30 June 20X1.Evil Ltd does not control any entities.What is the journal entry to record these dividends for Evil Ltd for the year ended 30 June 20X1 using the equity method?
A)$\begin{array} { l r c } 
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Dividend receivable } & 200000 & \
\text { Dividend revenue } & & 200000 \
\begin{array} { l } 
\text { Bank } \
\text { Investment in Electric }
\end{array} & 300000 & \
& & 300000
\end{array}$
B)$\begin{array} { l c c } 
\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \
\text { Dividend receivable } & 200000 & \
\text { Bank } & 300000 & \
\text { Dividend revenue } & & 500000
\end{array}$
C)$\begin{array} { l r r } 
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Dividend receivable } & 60000 & \
\text { Bank } & 40000 & \
\text { Investment in Electric } & & 100000
\end{array}$
D)$\begin{array} { l r r } 
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Dividend receivable } & 40000 & \
\text { Bank } & 60000 & \
\text { Dividend revenue } & & 100000
\end{array}$

Quizplus · Accepted Answer

Under the equity method, dividends received from the investee reduce the carrying amount of the investment. Evil Ltd owns 20% of Electric Ltd, so it would receive 20% of the dividends declared. The dividends declared were $200,000 (from prior year's profits) and $300,000 (from current year's profits), totaling $500,000. 20% of $500,000 is $100,000. Therefore, the journal entry should reduce the investment in Electric Ltd by $100,000, recognizing $60,000 as dividend receivable (20% of $300,000 declared out of current year profits, which is received) and $40,000 as bank (20% of $200,000 declared out of prior year profits, which is received).

Evil Ltd Acquired 20% of and Significant Influence Over the Operations