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Equity method - and had net income of $150,000 Under the...

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Equity method The equity method of accounting for stock investments is used when the investor is able to  significantly influence the operating and financial policies or decisions of the company it has invested  in. Given this influence, the investor adjusts the value of its equity investment for dividends received  from, and the earnings (or losses) of, the corporation whose stock has been purchased. The  dividends received are accounted for as a reduction of the investment value because dividends are a  partial return of the investor's investment. Assume The Sisters, Inc. acquired 30% of the stock of  2005 GROUP for $72,000 on Jan. 1. During the year, 2005 GROUP paid dividends totaling $30,000 
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Unformatted text preview: and had net income of $150,000. Under the equity method, the $9,000 in dividends ($30,000 × 30%) received by The Sisters, Inc. would decrease the Investment in 2005 GROUP account rather than be reported as dividend revenue. The same account would increase $45,000 for The Sisters, Inc. 30% share of net income ($150,000 × 30%) as they treat their share of net income as revenue. At the end of the year, the balance in the Investment in 2005 GROUP account would be $108,000. Investment in 2005 Group Investment 72,000 9,000 Dividends Received Share of net income 45,000 108,000...
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