Penney Corporation acquires 30% of the outstanding voting common shares of the Instat Corporation for $600,000.Penney Corporation acquires the investment in Instat Corporation by buying previously issued shares of Instat Corporation from other investors. Between the time of the acquisition and the end of Penney Corporation's next accounting period, Instat Corporation reports earnings of $80,000.Penney Corporation records the following journal entry:

Question

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Under the equity method of accounting for investments, the investor records its share of the earnings of the investee. Since Penney Corporation owns 30% of the outstanding voting common shares of Instat Corporation, it has significant influence over the investee and can exercise control over its operating and financial policies. Therefore, Penney Corporation should use the equity method to account for its investment in Instat Corporation. 
Accordingly, the journal entry to record the earnings of Instat Corporation would be:
Investment in Stock of Instat Corporation ............................ $24,000
Equity in Earnings of Affiliate (Instat Corporation) .................. $24,000 
This is because Penney Corporation's 30% share of the $80,000 earnings of Instat Corporation is $24,000, which is the amount to be recognized as its share of earnings in the current period.

Penney Corporation Acquires 30% of the Outstanding Voting Common Shares