On July 1,20X8,Pair Logic Corporation acquires 75 percent of Systems Inc.common stock for its underlying book value.At the time of acquisition,the fair value of the noncontrolling interest is equal to its proportionate share of book value of Systems.On January 1,20X8 Systems reported common stock of $100,000 and retained earnings of $130,000.For the year 20X8,Systems reports the following items:
Pair Logic uses the equity method in accounting for this investment.
-Based on the preceding information,what journal entry would Pair Logic make to record equity method income for the year?

A)Option A
B)Option B
C)Option C
D)Option D

Question

On July 1,20X8,Pair Logic Corporation acquires 75 percent of Systems Inc.common stock for its underlying book value.At the time of acquisition,the fair value of the noncontrolling interest is equal to its proportionate share of book value of Systems.On January 1,20X8 Systems reported common stock of $100,000 and retained earnings of $130,000.For the year 20X8,Systems reports the following items:
  Pair Logic uses the equity method in accounting for this investment.
-Based on the preceding information,what journal entry would Pair Logic make to record equity method income for the year?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

Under the equity method, income is recognized based on the investor's share of the investee's net income. In this case, Pair Logic acquired 75% of Systems Inc. Therefore, Pair Logic's share of Systems Inc.'s net income for the year 20X8 would be 75% of net income.

As per the information provided, Systems Inc.'s net income for the year 20X8 was $60,000. Therefore, Pair Logic's equity method income would be $45,000 (i.e., 75% of $60,000).

The journal entry to record equity method income would be:
Debit: Investment in Systems Inc. - $45,000 
Credit: Equity in Earnings of Systems Inc. - $45,000

Option B correctly reflects this journal entry, hence it is the best choice.

On July 1,20X8,Pair Logic Corporation Acquires 75 Percent of Systems