Nance Company owns 40% interest in the shares of Finley Corporation.

Nance Company owns 40% interest in the shares of Finley Corporation. During the year,Finley pays $25,000 in dividends, and reports $100,000 in net income. Nance Company’sinvestment in Finley will increase by

a.$25,000.
b.$40,000.
c.$32,000.
d.$30,000.

ANSWER: The investor reports his or her portion of the investee’s net income using the equity method, in this case 40% of $100,000 = $40,000.

Osaka Co. acquired a 10% interest in Chen Corp. on December 31, 2013 for HK$3,780,000.

Osaka Co. acquired a 10% interest in Chen Corp. on December 31, 2013 for HK$3,780,000. During 2014, Chen had net income of HK$2,400,000 and paid cash dividends of HK$600,000. Osaka’s 2014 income statement will report

a. dividend income of HK$60,000.
b. investment income of HK$180,000.
c. investment income of HK$240,000.
d. cannot be determined from the information given.

Step-by-Step explanation

Osaka’s share of Chen’s net income for 2014 is 10% × HK$2,400,000 = HK$240,000.

Osaka’s share of Chen’s cash dividends for 2014 is 10% × HK$600,000 = HK$60,000.

Osaka’s investment income for 2014 is therefore HK$240,000 – HK$60,000 = HK$180,000.