On January 1, 2016, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000. Turtle uses the equity method of accounting for this investment is used. During 2016, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2016, the shares had a fair value of $160,000. How much investment income will Turtle report for equity in affiliate earnings during 2016?

Question

Quizplus · Accepted Answer

Under the equity method, Turtle Inc. will recognize its share of Shell Corporation's net income. Turtle owns 30% of Shell, so it will recognize 30% of $40,000, which is $12,000, as investment income.