On January 1, 2014, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 2014, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 2014, the shares had a market value of $160,000. How much investment income will Turtle report from the Shell investment during 2014?

Question

Quizplus · Accepted Answer

The equity method involves recognizing a share of the investee's income or loss in the investor's income statement. 
Turtle bought 30% of Shell's outstanding shares, therefore, its share of earnings would be 30% x $40,000 = $12,000. 
In addition, Turtle would also recognize its share of the dividend received, which would be 30% x $5,000 = $1,500. 
Therefore, Turtle's investment income from the Shell investment during 2014 would be $12,000 + $1,500 = $13,500, which is not one of the answer choices. However, Turtle should also recognize its share of the increase in the market value of the investment, which would be 30% x ($160,000 - $150,000) = $3,000. 
Thus, the total investment income for Turtle during 2014 would be $12,000 + $1,500 + $3,000 = $16,500, which is closest to choice C ($12,000).