An investor company owns 40% of the shares in an investee.If the share investment is being accounted for using the equity method of accounting and the investee earns $250,000 of net income,the investor will make an entry that includes a:

Question

Quizplus · Accepted Answer

Under the equity method of accounting, the investor recognizes its share of the investee's net income as Investment Revenue. In this case, the investor owns 40% of the investee's shares, so it would recognize 40% of the net income or $100,000 as Investment Revenue. Therefore, the correct answer is B) credit to Investment Revenue of $100,000.

Option A is incorrect because Dividend Revenue is recognized only when the investee pays dividends, and there is no information provided about whether the investee paid any dividends.

Option C is incorrect because the Long-Term Investment account is not affected by the investee's net income. This account is used to record the initial investment and subsequent adjustments for equity method accounting, as well as any dividends received from the investee.

Option D is incorrect because a journal entry is required to recognize the investor's share of the investee's net income under the equity method of accounting.

An Investor Company Owns 40% of the Shares in an Investee.If