On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment.
-Based on the preceding information,what amount of investment income will William Company report from its investment in eGate for the year?
A) $45,000
B) $42,000
C) $62,000
D) $35,000

Question

Quizplus · Accepted Answer

To calculate investment income using the equity method, we start with the dividends received by the investor, which are subtracted from the investee's net income. Then, the investor's share of the investee's net income is added to this amount.

In this case, William Company acquired 30% of eGate Company's common stock, which means it is entitled to 30% of the dividends paid by eGate. Therefore, William received dividends of $72,000 x 30% = $21,600.

To calculate the investment income, we start with eGate's net income of $150,000 and subtract the dividends received by William of $21,600. This gives us $128,400.

William's share of eGate's net income is 30%, which means its share of the net income is $128,400 x 30% = $38,520.

Therefore, the total investment income reported by William Company for the year is $38,520 + $21,600 = $60,120.

The closest answer to this amount is B) $42,000. However, this answer is not correct as it is only equal to William's share of eGate's net income, without accounting for the dividends received.

On January 1, 20X8, William Company Acquired 30 Percent of EGate