Question

Newsome Company owns 30% of Company Red and applies the equity method for this investment. For the current year, Company Red reports $140,000 of income and pays $20,000 of dividends. How much should Newsome Company report as "Equity in Investee's Income"?

Answer 1

Answer:

Equity in investee's income = $36,000

Explanation:

When the investment in a company's equity is more than 20% the investing company follows equity method for accounting investments in such company.

Here, Newsome Company owns 305 of Company Red thus, it follows equity method. As per this method all the incomes of subsidiary are added and all the dividends on common equity are deducted from carrying value of investment.

Thus, here equity in Investee's income = $140,000 $\times$ 30% = $42,000 - Dividend share.

Note: here it is assumed that net income is after providing for dividend, else after deducting dividend from $140,000 we get $120,000 and 30% of such = $36,000 shall be equity in investee's income. Further deducting dividend we have $20,000 $\times$ 30% $6,000

Thus, equity in investee's income = $42,000 - $6,000 = $36,000