On July 1,20X4,Pillow Corp.obtained significant influence over Sleep Co.through the purchase of 3,000 shares of Sleep's 10,000 outstanding shares of common stock for $20 per share.On December 15,20X4,Sleep paid $40,000 in dividends to its common stockholders.Sleep's net income for the year ended December 31,20X4,was $120,000,earned evenly throughout the year.In its 20X4 income statement,what amount of income from this investment should Pillow report?

Question

Quizplus · Accepted Answer

Since Pillow Corp. obtained significant influence over Sleep Co., it must use the equity method to record its investment in Sleep. Under the equity method, Pillow Corp. needs to recognize its share of Sleep's net income and dividends as follows:
Share of net income = $120,000 × 30% (Pillow's ownership percentage) = $36,000
Share of dividends = $40,000 × 30% = $12,000
Since Sleep paid dividends only once during the year, this is the only amount of income that should be reported in Pillow Corp.'s income statement for the year ended December 31, 20X4. Therefore, the correct answer is (C) $18,000 (i.e., $12,000 in dividends plus $6,000 in unrealized income based on the share of net income earned through July 1, 20X4).