On January 4, 2010, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2010, Bike reported net income of $500,000. For 2011, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years.
How much income did Harley report from Bike for 2010?

Question

Quizplus · Accepted Answer

Harley has 40% ownership in Bike, which gives it the ability to exercise significant influence over the company. Therefore, Harley should use the equity method to account for its investment in Bike. 
In 2010, Bike reported net income of $500,000. Harley's share of this income would be 40% x $500,000 = $200,000. 
Therefore, income reported by Harley from Bike for 2010 is $200,000.