Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation,and Heartfelt accounts for the investment using the equity method.During 2019,Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000.The carrying value of the Candle investment was $500,000 on January 1,2019.
- How much investment income should Heartfelt report during 2019 from the Candle investment?
A)$36,000.
B)$40,000.
C)$4,000.
D)$10,000.

Question

Quizplus · Accepted Answer

Under the equity method, the investor records its share of the investee's net income as investment income. Heartfelt owns a 40% interest in Candle, so its share of Candle's net income would be $100,000 x 40% = $40,000. However, Heartfelt only records investment income based on its share of Candle's declared dividends. Since Candle declared dividends of only $10,000, Heartfelt records investment income of $10,000 x 40% = $4,000. Therefore, the correct answer is option B.

Heartfelt Company Owns a 40% Interest in the Voting Common