In 2015, 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 2015, the net effect of the entries made by Gigajoule Corporation in 2015 will be to:

Question

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The equity method requires the investor to record its share of the investee's net income or loss and dividends received as adjustments to the Investment account. In this case, Gigajoule Corporation has a 25% ownership interest in Megawatt Corporation, which means it would record its share of Megawatt Corporation's $400,000 of income as a $100,000 increase to the Investment account. Similarly, it would record its share of Megawatt Corporation's $80,000 of dividends as an $20,000 decrease to the Investment account. Therefore, the net effect on the Investment account would be an increase of $80,000 ($100,000 - $20,000), which is choice D.

In 2015, Gigajoule Corporation Used the Equity Method to Account