Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to account for its investment.
-Compute income from Stiller on Leo's books for 2010.
A) $110,000.
B) $100,000.
C) $125,000.
D) $85,000.
E) $88,000.

Question

Quizplus · Accepted Answer

According to the equity method, Leo recognizes its share of Stiller's net income, which is 80%. Therefore, income from Stiller on Leo's books for 2010 would be $100,000 ($125,000 × 0.80), which reflects Leo's share of Stiller's net income for that period. The land sale between the two companies does not affect the calculation of income under the equity method.

Stiller Company, an 80% Owned Subsidiary of Leo Company, Purchased