On January 1, 2014, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 2014, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 2014, the shares had a market value of
$150,000. How much income will Palmer report from the Arnold investment during 2014?

Question

Quizplus · Accepted Answer

Using the equity method, Palmer will record income based on its share of Arnold's net earnings. 
Palmer's share of Arnold's net earnings = 40% x $30,000 = $12,000. 
Palmer will also record its share of Arnold's cash dividends, which is 40% x $10,000 = $4,000. 
Therefore, Palmer's net income from the investment in Arnold during 2014 will be $12,000 - $4,000 = $8,000.