On January 1, 20X4, 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 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000.
-How much investment income will Turtle report from the Shell investment during 20X4?
A) $12,000
B) $40,000
C) $5,000
D) $1,500

Question

On January 1, 20X4, 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 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. 
-How much investment income will Turtle report from the Shell investment during 20X4?
A) $12,000
B) $40,000
C) $5,000
D) $1,500

Quizplus · Accepted Answer

Calculation: Investment income ($12,000) = Investee net income ($40,000) × Ownership percentage (30%).