Power Generation Corp. owns 38% of Electric Limited. Net income for Electric Limited for the year ending December 31, 2014, is $450,000. The journal entry prepared by Power Generation Corp. on December 31, 2014, includes a:

Question

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Power Generation Corp. owns 38% of Electric Limited, which means they have a significant influence but not a controlling interest. Therefore, Power Generation Corp. follows the equity method of accounting for their investment in Electric Limited. Under the equity method, the investor records its share of the investee's net income as an increase to its Long-Term Investment account.

In this case, Power Generation Corp.'s share of Electric Limited's net income for the year is $171,000 ($450,000 × 38%). Therefore, the journal entry prepared by Power Generation Corp. on December 31, 2014, would include a debit to Long-Term Investment for $171,000 (Option D).