On January 1, 2013, Tonya Ltd. started Chen Ltd. by contributing $600,000 and received 100% of the common shares of Chen. Chen reported net income of $40,000 in 2013 and $85,000 in 2014 and paid out 40% of its net income as dividends in each year. Under the equity method, which of the following amounts should be reported on Tonya's separate-entity 2014 financial statements?

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Quizplus · Accepted Answer

Under the equity method, Tonya Ltd. would increase its investment in Chen Ltd. by the amount of net income earned by Chen and decrease it by the dividends received. For 2013, the net income was $40,000, and dividends were 40% of that, or $16,000, leading to a net increase in investment of $24,000 ($40,000 - $16,000). This makes the investment value $624,000 at the end of 2013. For 2014, the net income was $85,000, and dividends were 40% of that, or $34,000, leading to a net increase in investment of $51,000 ($85,000 - $34,000). Adding this to the $624,000 from 2013 gives a total investment value of $675,000 at the end of 2014. The investment income reported for 2014 would be the net income from Chen for that year, which is $85,000.

On January 1, 2013, Tonya Ltd Investment in Chen Investment Income $600,000$34,000\begin{array} { | l | l | } \hline \text { Investment in Chen } & \text { Investment Income } \\\hline \$ 600,000 & \$ 34,000 \\\hline\end{array} Investment in Chen $600,000​ Investment Income $34,000​​

On January 1, 2013, Tonya Ltd $\begin{array} { | l | l | } \hline \text { Investment in Chen } & \text { Investment Income } \\\hline \$ 600,000 & \$ 34,000 \\\hline\end{array}$