Pareto Corporation owns 40% of Spring Corporation.During Year 3, Spring has net income of $60,000.What entry should Pareto record related to its investment in Spring during Year 3?

Question

Quizplus · Accepted Answer

Since Pareto owns 40% of Spring Corporation, it has an equity method investment in Spring. Under the equity method, Pareto records its share of Spring's net income as an increase in its investment account. Therefore, the entry should be Investment in Spring Corp. 24,000 and Equity in Earnings of Affiliate 24,000 to reflect Pareto's share of Spring's net income. The other options do not reflect the equity method of accounting.

Pareto Corporation Owns 40% of Spring Corporation