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An investor company owns 30% of the outstanding common stock of an investee company, which allows the investor to exercise significant influence over the investee. The Equity Investment was reported at $500,000 as of the end of the previous year. During the year, the investor received dividends of $60,000 from the investee. The investee reports the following income statement for the year:

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Answer:

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a. Equity income that the investor should report in its income = Net income * Investor share = 400,000 * 30% = $120,000

b. Particulars                                 Amount

Equity investment opening           500,000

Add: Equity income                        120,000

Less: Dividend paid                        60,000

Equity investment at end of year  560,000

c. The fair value of the Investee company will remain at adjusted cost. and the investment is not adjusted to fair value

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