ABC buys a 25 per cent share in XYW for $80 million. XYW's total net profit is $50 million and it pays $4 million in dividends to ABC. Using the equity method, the revenue recognised for this investment during the year would be:

Question

Quizplus · Accepted Answer

The equity method recognizes the investor's share of the net income of the investee. Since ABC bought a 25% share in XYW, its share of the net profit would be 25% x $50 million = $12.5 million. However, XYW paid a dividend of $4 million to ABC, so the revenue recognized for this investment during the year would be $12.5 million - $4 million = $8.5 million. Therefore, the correct answer would be B) $15 million, which is the closest option to $8.5 million.

ABC Buys a 25 Per Cent Share in XYW for $80