On 1 January 2019, Sky-High Ltd acquired 100 000 shares (30 per cent of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2019, Down Ltd announced its earnings per share for the first six months of 2019 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2019, Down Ltd announced its earnings per share for 2019 at $2.80 per share (i.e. $1.30 additional since 30 June). If Sky-High Ltd used the equity basis, which of the following accounting records would it make on 31 December 2019 in response to Down Ltd's earnings announcement?

Question

Quizplus · Accepted Answer

Since Sky-High Ltd uses the equity method, it recognizes its share of Down Ltd's profits as an increase in the carrying amount of its investment in Down Ltd. Therefore, on 31 December 2019, Sky-High Ltd would increase investment in Down Ltd by $130,000 ($1.30 per share x 100,000 shares x 30%). Option A is the correct choice. Option B is incorrect because there is no cash transaction involved. Option C is incorrect because dividend revenue was already recognized when Down Ltd paid dividends on 20 November. Option D is incorrect because dividend revenue was already recognized, and it would be incorrect to increase it again in response to the earnings announcement.

On 1 January 2019, Sky-High Ltd Acquired 100 000 Shares