In 2017,Gigajoule Corporation used the equity method to account for a 25% ownership interest in Megawatt Corporation.If Megawatt Corporation reports $400,000 of income and pays $80,000 of dividends in 2017,the net effect of the entries made by Gigajoule Corporation in 2017 will be to:

Question

Quizplus · Accepted Answer

Under the equity method, the investor records its share of the investee's net income and dividends as adjustments to the Investment account. In this case, Megawatt Corporation reports $400,000 of income, and since Gigajoule Corporation owns 25% of Megawatt, it will record $100,000 (25% x $400,000) as its share of income, which will increase its Investment account. Similarly, Megawatt pays $80,000 of dividends, so Gigajoule will record $20,000 (25% x $80,000) as its share of dividends, which will decrease its Investment account.

Thus, the net effect of the entries made by Gigajoule Corporation in 2017 will be an increase in the Investment account of $100,000 (income), less a decrease of $20,000 (dividends), resulting in an overall increase of $80,000. Therefore, the correct answer is D, which indicates an increase in the Investment account by $80,000.

In 2017,Gigajoule Corporation Used the Equity Method to Account for a 25