On January 1, 2016, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this investment. During 2016, Arnold Corporation reported $30,000 of net income and paid a total of $10,000 in cash dividends. At the end of 2016, the shares had a fair value of $150,000. At the end of 2016, the shares had a fair value of $150,000. What is the amount of Equity in Affiliate Earnings for 2016?

Question

Quizplus · Accepted Answer

Under the equity method, Palmer, Inc. would recognize its share of Arnold Corporation's net income. Since Palmer owns 40% of Arnold, it would recognize 40% of $30,000, which is $12,000, as Equity in Affiliate Earnings for 2016.