Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1,2016.Jack can significantly influence Jill.On December 10,2016,Jill declared and paid $1 million in dividends.Jill reported a net loss of $6 million for the year.What amount of loss should Jack report in its income statement for 2016 relative to its investment in Jill?

Question

Quizplus · Accepted Answer

As Jack has a significant influence on Jill, it should use the equity method to report its investment in Jill.
Under the equity method, the investment is initially recorded at cost and then adjusted for Jack's share of Jill's earnings or losses and dividends.
Therefore, Jack's share of Jill's loss for the year would be 20% of $6 million, which is $1.2 million.
However, as Jill declared and paid dividends during the year, Jack's share of the dividends should be subtracted from its share of the loss to arrive at the net amount to be reported on Jack's income statement.
So Jack's share of the net loss after deducting the dividends would be $1.2 million - $200,000 (20% of $1 million dividends) = $1 million.
Therefore, the answer is B) $1,200,000.

Jack Corporation Purchased a 20% Interest in Jill Corporation for $1,500,000