Equity Method Accounting for Intercorporate Investments

Very Hard Intercorporate Investments Equity Method

ABC Corporation owns 30% of the voting stock of XYZ Ltd., a company that operates in the technology sector and has been profitable since its inception. For the year ended December 31, 2022, XYZ Ltd. reported net income of $1,000,000 and paid dividends of $200,000. ABC Corporation uses the equity method for accounting for this investment.

Given this background, please determine the appropriate entry that ABC Corporation should make to recognize its share of XYZ Ltd.'s net income and dividends for the year, and determine the impact on ABC's balance sheet. Which of the following statements accurately describes ABC Corporation's accrual for its investment in XYZ Ltd.?

ABC Corporation should recognize $300,000 in income and $60,000 in dividends when using the equity method.

ABC Corporation should recognize $300,000 in income and reduce its investment account by $200,000 for the dividends received.

ABC Corporation should recognize $300,000 in income but not record a reduction in the investment account for the dividends.

Hint

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