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Your Corporation owns 25% of ABC under the equity method. ABC reports net income of $100,000. What entry does the investor make?
ANo journal entry is required at all
BDebit Cash $25,000; credit Investment Income $25,000
CDebit Investment in ABC Stock $25,000; credit Investment Income $25,000
DDebit Investment Income $25,000; credit Investment in ABC Stock $25,000
Answer & Solution
Correct answer: C. Debit Investment in ABC Stock $25,000; credit Investment Income $25,000
1. Under the equity method the investor recognises its share of the investee's net income.
2. Share $= \$100{,}000 \times 25\% = \$25{,}000$.
3. This increases the investment: debit Investment in ABC Stock $25,000; credit Investment Income $25,000.
4. Option A is the fair value method treatment; B wrongly records cash; D reverses the entry.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.9.2 "Recognize Net Income of the Issuing Corporation", p.185_
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