Jabba Inc. owns 35% of Hutt Corp., and has significant influence over Hutt. During the calendar year 2020, Hutt reported net income of $ 300,000 and paid dividends of $ 30,000. Jabba mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on Jabba's investment account, net income, and retained earnings, respectively?

Question

Quizplus · Accepted Answer

Using the cost method instead of the equity method would understate Jabba's investment account because it would not reflect its share of Hutt's net income. It would also understate net income and retained earnings because Jabba would not recognize its share of Hutt's net income, which should be added to its own net income and retained earnings.

Jabba Inc Owns 35% of Hutt Corp