Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2016. Suburbia reported net income in 2016 of $90,000 and in 2017 of $120,000 earned evenly throughout the respective years. Prime received $24,000 dividends from Suburbia in 2016 and $36,000 in 2017. Prime uses the equity method to record its investment. Prime should record investment income from Suburbia during 2017 of:

Question

Quizplus · Accepted Answer

Under the equity method, Prime would recognize its share of Suburbia's net income as investment income. Prime owns 70% of Suburbia, so for 2017, it would recognize 70% of Suburbia's $120,000 net income, which is $84,000. Dividends received reduce the carrying amount of the investment and are not recognized as income under this method.

Prime Industries Acquired a 70 Percent Interest in Suburbia Company