Baker Ltd acquired 22% of and significant influence over the operations of Street Ltd on 1 July 20X0.During the financial year ended 30 June 20X1, Street Ltd earned a profit of $140 000.Baker Ltd does not control any entities.What is the journal entry to record the share of Street Ltd's result in the accounts of Baker Ltd for the year ended 30 June 20X1 using the equity method?
A)$\begin{array} { l r r }
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Investment in Street Ltd } & 30800 & \
\text { Dividend revenue } & & 30800
\end{array}$
B)$\begin{array} { l r r }
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Investment in Street Ltd } & 30800 & \
\text { Share of associate's profit or loss } & & 30800
\end{array}$
C)$\begin{array} { l c c }
\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \
\text { Investment in Street Ltd } & 140000 & \
\text { Dividend revenue } & & 140000
\end{array}$
D)No journal entry because Baker Ltd must use the cost method

Question

Baker Ltd acquired 22% of and significant influence over the operations of Street Ltd on 1 July 20X0.During the financial year ended 30 June 20X1, Street Ltd earned a profit of $140 000.Baker Ltd does not control any entities.What is the journal entry to record the share of Street Ltd's result in the accounts of Baker Ltd for the year ended 30 June 20X1 using the equity method?
A)$\begin{array} { l r r } 
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Investment in Street Ltd } & 30800 & \
\text { Dividend revenue } & & 30800
\end{array}$
B)$\begin{array} { l r r } 
\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \
\text { Investment in Street Ltd } & 30800 & \
\text { Share of associate's profit or loss } & & 30800
\end{array}$
C)$\begin{array} { l c c } 
\text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \
\text { Investment in Street Ltd } & 140000 & \
\text { Dividend revenue } & & 140000
\end{array}$
D)No journal entry because Baker Ltd must use the cost method

Quizplus · Accepted Answer

Under the equity method, the investor recognizes its share of the investee's profit or loss in its income statement. Therefore, the journal entry to record the share of Street Ltd's profit in the accounts of Baker Ltd for the year ended 30 June 20X1 would be:
Investment in Street Ltd Dr. 30,800
Share of associate's profit or loss Cr. 30,800

Baker Ltd Acquired 22% of and Significant Influence Over the Operations