Wolverine Corporation owns 29% of Buckeye Corporation.Net income for Buckeye for the year is $250,000.The journal entry prepared by Wolverine Corporation is:

Question

Quizplus · Accepted Answer

The equity method is used when an investor has significant influence over an investee, which is typically presumed when ownership exceeds 20% but is less than 50%. In this case, Wolverine Corporation owns 29% of Buckeye Corporation and therefore has significant influence.

Under the equity method, the initial investment is recorded as an asset, and the investor's share of the investee's net income or loss is recorded as revenue or expense.

As Buckeye Corporation's net income for the year is $250,000 and Wolverine Corporation owns 29%, Wolverine Corporation's share of the net income is $72,500 (29% x $250,000). Therefore, the journal entry prepared by Wolverine Corporation would be to debit Equity-Method Investment for $72,500 and credit Equity-Method Investment Revenue for $72,500. This entry recognizes the increase in the value of the investment due to the share of income received from Buckeye Corporation.

Wolverine Corporation Owns 29% of Buckeye Corporation