Retail Energy Corporation paid $1,300,000 on January 1, 2015, to purchase 32% of the outstanding shares of Natural Gas Limited. In 2015 Natural Gas Limited reported $450,000 of net income and paid $100,000 in dividends. If this investment is accounted for using the equity method of accounting, what will be the impact on the books of Retail Energy Corporation?

Question

Quizplus · Accepted Answer

The equity method of accounting requires the investor to record its share of the investee's net income, which is $144,000 (32% x $450,000). Dividends received reduce the investment account but have no impact on income recognition. Therefore, the investment account will be unchanged by the dividend payment of $100,000. So, income of $144,000 will be recorded under the equity method.

Retail Energy Corporation Paid $1,300,000 on January 1, 2015, to Purchase