Gunnar Ltd. owns 100% of the common shares of Ivy Ltd. During the year, Gunnar reported net income of $108,000, including its income from its investment in Ivy accounted for under the cost method. Ivy reported net income of $20,000 and paid dividends of $8,000 during the year. What net income will be reported by Gunnar on its separate-entity financial statements under the equity method and on its consolidated financial statements?

A) $$112,000$112,000\begin{array} { | l | l | } \hline \text { Equity Method } & \text { Consolidated Financial Statements } \\\hline\$ 112,000 & \$ 112,000\\\hline\end{array}$
B) $$112,000$120,000\begin{array} { | l | l | } \hline \text { Equity Method } & \text { Consolidated Financial Statements } \\\hline\$ 112,000 & \$ 120,000\\\hline\end{array}$
C) $$120,000$112,000\begin{array} { | l | l | } \hline \text { Equity Method } & \text { Consolidated Financial Statements } \\\hline\$ 120,000 & \$ 112,000\\\hline\end{array}$
D) $$120,000$120,000\begin{array} { | l | l | } \hline \text { Equity Method } & \text { Consolidated Financial Statements } \\\hline\$ 120,000 & \$ 120,000\\\hline\end{array}$

Question

Gunnar Ltd. owns 100% of the common shares of Ivy Ltd. During the year, Gunnar reported net income of $108,000, including its income from its investment in Ivy accounted for under the cost method. Ivy reported net income of $20,000 and paid dividends of $8,000 during the year. What net income will be reported by Gunnar on its separate-entity financial statements under the equity method and on its consolidated financial statements?A)     Equity Method   Consolidated Financial Statements  $ 112 , 000 $ 112 , 000 \begin{array} { | l | l | } \hline 	ext { Equity Method }  &  	ext { Consolidated Financial Statements } \\hline\$ 112,000  &  \$ 112,000\\hline\end{array}  Equity Method  $112 , 000 ​  Consolidated Financial Statements  $112 , 000 ​ ​ B)     Equity Method   Consolidated Financial Statements  $ 112 , 000 $ 120 , 000 \begin{array} { | l | l | } \hline 	ext { Equity Method }  &  	ext { Consolidated Financial Statements } \\hline\$ 112,000  &  \$ 120,000\\hline\end{array}  Equity Method  $112 , 000 ​  Consolidated Financial Statements  $120 , 000 ​ ​ C)     Equity Method   Consolidated Financial Statements  $ 120 , 000 $ 112 , 000 \begin{array} { | l | l | } \hline 	ext { Equity Method }  &  	ext { Consolidated Financial Statements } \\hline\$ 120,000  &  \$ 112,000\\hline\end{array}  Equity Method  $120 , 000 ​  Consolidated Financial Statements  $112 , 000 ​ ​ D)     Equity Method   Consolidated Financial Statements  $ 120 , 000 $ 120 , 000 \begin{array} { | l | l | } \hline 	ext { Equity Method }  &  	ext { Consolidated Financial Statements } \\hline\$ 120,000  &  \$ 120,000\\hline\end{array}  Equity Method  $120 , 000 ​  Consolidated Financial Statements  $120 , 000 ​ ​

Zybrea Knight · Accepted Answer

Final Answer : D, Explanation :  Under the equity method, Gunnar would adjust its net income by adding Ivy's net income ($20,000) and subtracting the dividends received ($8,000), resulting in an adjusted net income of $120,000 ($108,000 + $20,000 - $8,000). For consolidated financial statements, all of Ivy's net income is included, and intercompany dividends are eliminated, leading to a consolidated net income of $128,000 ($108,000 + $20,000). However, the correct interpretation of the question suggests that the dividends are not added back in the consolidated net income calculation, thus both under the equity method and on the consolidated financial statements, the net income reported would be $120,000, making the correct choice D.

Definitions

Learning Objectives

Learning Objectives

Related questions