At the beginning of 20X1,Rally Ltd.acquired 18% of Neily Co.for $90,000.Rally has significant influence over Neily.Rally records the investment in Neily using the cost method.Rally's share of Neily's income was $29,000 for 20X1 and $33,000 for 20X2.Rally received dividends from Neily of $25,000 for 20X1 and $35,000 in 20X2.For reporting purposes in 20X2,what adjustment must be made to recognize unremitted earnings from 20X1?
D)No entry is required

Question

Quizplus · Accepted Answer

Under the cost method, the investor recognizes dividend income and its share of the investee's income in the period earned. However, the investor does not recognize any unremitted earnings of the investee until a dividend is received or until the company reduces the investment. Therefore, to recognize the unremitted earnings from 20X1 for reporting purposes in 20X2, an adjustment must be made to the investment account in the amount of Rally's share of Neily's earnings for 20X1, which is $29,000. Therefore, the entry required is:

Debit: Investment in Neily Co. $29,000
Credit: Equity in Investee Income $29,000

At the Beginning of 20X1,Rally Ltd