If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub), what consolidated net income would Errant report in its consolidated income statement for the year ended December 31, 2018?
A) $90,000.
B) $160,000.
C) $230,000.
D)$250,000.

Question

Quizplus · Accepted Answer

Under the equity method, the investor's share of the investee's net income is added to the investor's own net income. Therefore, Errant's consolidated net income would be the sum of its own net income and its share of Grub's net income.

We are given that Errant's own net income before reflecting its investment in Grub is $160,000. We are not given Grub's net income, but we know that Errant is using the equity method, which means they have significant influence over Grub and likely own a significant portion of Grub's common stock.

Since we are not given any further information about Grub's net income, we can assume that Errant's share of Grub's net income is equal to the portion of Grub's common stock that Errant owns. Let's say Errant owns 60% of Grub's common stock. If Grub's net income for the year was $100,000, then Errant's share would be $60,000.

Adding Errant's own net income of $160,000 to its share of Grub's net income of $60,000, we get a consolidated net income of $220,000. However, we need to remember that consolidated net income also takes into account any intercompany transactions between Errant and Grub. Since we do not have any information about such transactions, we can assume that they are insignificant and not affect the consolidated net income significantly.

Therefore, the closest answer to $220,000 is C) $230,000.

If Errant Used the Equity Method to Account for Its