19. Ridge Company uses the equity method to account for its 60% investment in FM

Question

19. Ridge Company uses the equity method to account for its 60% investment in FMP Enterprises. During 2005, FMP earned net income of $65,000 and paid dividends of $19,000. In accounting for the investment during 2005, Ridge will a. credit Dividend Revenue, $11,400 b. credit Investment Income, $39,000. c. credit Revenue from Investment, $27,600 d. debit Cash, $27,600 20. Blackstone Company uses the equity method to account for its 30% investment in Meriton Enterprises. During 2005, Merliton earned net income of $45,000 and paid dividends of S13,000. In accounting for the investment during 2005, Blackstone will a. credit Dividend Revenue, $3,900 b. credit Investment Income, $13,500. c. credit Revenue from Investment, $9,600 d. debit Cash, $9,600

Explanation / Answer

19. Dividend Received = $19000 * 60% = $11400

Share in FMP's Net Income = $65000 * 60% = $39000

The Journal under equity method shall be as follows -

(i) Cash A/C Dr. 11400

To Investment in Associate A/C 11400

( Dividend received recorded)

(ii) Investment in Associate A/C Dr. 39000

To Investment Income A/C 39000

(Investee's income share recorded)

Therefore, the correct answer is b) credit Investment Income , $39000.

20. Dividend Received = $13000 * 30% = $5200

Share in FMP's Net Income = $45000 * 30% = $13500

The Journal under equity method shall be as follows -

(i) Cash A/C Dr. 5200

To Investment in Associate A/C 5200

( Dividend received recorded)

(ii) Investment in Associate A/C Dr. 13500

To Investment Income A/C 13500

(Investee's income share recorded)

Therefore, the correct answer is b) credit Investment Income , $13500.

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