Question

On January 1, 2019, Windy Meadows Corp. acquired a 10% interest in Jones Enterprises. On January 1, 2020, Windy Meadows acquired an additional 20% Jones's common stock. No goodwill resulted from either purchase. Jones reported net incomes of $500,000 and $400,000 for 2019 and 2020, respectively. Dividends paid by Jones amounted to $275,000 in 2019 and $125,000 in 2020. What amount of Equity Income should be reported by Windy Meadows in 2020?

Answer 1

$120,000

Step-by-step explanation:

Since Windy Meadows acquired 20% more of Jones's stocks, its total stake increased to 30% which represents a significant influence, and therefore, the equity method must be used to record this investment.

Under the equity method, dividends received decrease the investment account (not considered revenue) while net income reported represents investment revenue.

December 31, 2020, Jones Company reports net income

Dr Investment in Jones Company 120,000

Cr Investment revenue 120,000

Investment revenue = $400,000 (total net income 2020) x 30% stake = $120,000.