A 30% ownership interest in an investee is being accounted for using the equity method.If the investee reports $250,000 of income,and pays $100,000 of dividends for the current year,the net effect of the entries made by the investor will be to:

Question

Quizplus · Accepted Answer

Under the equity method, the investor recognizes their share of the investee's income and dividends. The investor's share of income (30% of $250,000) is $75,000, which increases the Investment in Common Shares account. The dividends received (30% of $100,000) are $30,000, which decreases the account. The net effect is an increase of $45,000 ($75,000 - $30,000).

A 30% Ownership Interest in an Investee Is Being Accounted