Emerald Investments, Inc. purchased 40% of the common stock of Diamond Corporation on March 1, 2018. Diamond Corporation reports a net income of $675,000 for the year 2019. Which of the following is true of the balance sheet on December 31, 2019?

Question

Quizplus · Accepted Answer

When Emerald Investments purchased 40% of Diamond Corporation, they acquired a significant influence over the company. As a result, their investment in Diamond Corporation should be accounted for using the equity method. Under the equity method, the investor's share of the investee's net income is recognized as an increase in the investment account and an increase in equity. Therefore, total equity on the balance sheet will increase by 40% of Diamond Corporation's net income of $675,000, or $270,000. Total assets and liabilities are not affected by the recognition of the investor's share of net income. There is no information to suggest that cash will increase.