Final answer:
To adjust long-term investments with significant influence where retained earnings have increased, a journal entry debiting the investment account and crediting equity in investee earnings is made to reflect the investor's share of the earnings.
Step-by-step explanation:
When adjusting long-term investments in which there is significant influence, and the investee company's retained earnings have increased, an equity method of accounting is used. The journal entry to reflect the share of the investee's increased retained earnings typically involves a debit to the investment account and a credit to the equity earnings or income from the investment account. This accounting treatment recognizes the investor's proportionate share of the earnings generated by the investee.
The journal entry would look like this:
- Debit: Investment in Associate (Showing the increase in the value of the investment due to the share of earnings)
- Credit: Equity in Investee Earnings (Representing the investor's share of the investee's retained earnings that have been reported)
This adjustment increases the investment account on the balance sheet and recognizes the investor's share of earnings in the income statement. The exact amount will depend on the percentage of ownership and the amount of earnings reported by the subsidiary.