In 2020, Gigajoule Corporation used the equity method to account for a 25% ownership interest in Megawatt Corporation. If Megawatt Corporation reports $400,000 of income and pays $80,000 of dividends in 2020, the net effect of the entries made by Gigajoule Corporation in 2020 will be to:
A) reduce the Investment account by $320,000
B) increase the Investment account by $320,000
C) increase the Investment account by $80,000
D) reduce the Investment account by $80,000

Question

Quizplus · Accepted Answer

Gigajoule Corporation will recognize 25% of Megawatt's income, which is $100,000 (25% of $400,000), increasing the Investment account. The dividends received ($80,000 * 25% = $20,000) will reduce the Investment account. The net effect is an increase of $80,000 ($100,000 income - $20,000 dividends).

In 2020, Gigajoule Corporation Used the Equity Method to Account