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 2011?

Question

Quizplus · Accepted Answer

Harley has significant influence over Bike as it owns 40% of the outstanding common stock. Therefore, Harley should use the equity method to account for its investment in Bike. Under the equity method, Harley reports its share of Bike's net income as income on its own income statement.
For 2011:
Harley's share of Bike's net income = 40% x $800,000 = $320,000
Therefore, Harley reported $320,000 income from Bike for 2011. The correct option is D.