With 30% ownership and the subsidiary earns net income of 20, by how much does the parent's Net Income increase?

With 30% ownership and the subsidiary earns net income of 20, by how much does the parent's Net Income increase?

• A. 20
• B. 6
• C. 0
• D. 14

Answer: (B)

Under the equity method, when the parent has significant influence (about 20% or more) over a subsidiary, it records its share of the subsidiary’s net income in its own income statement. The amount added to the parent's net income equals the ownership percentage times the subsidiary’s net income. Here, 30% of 20 is 6, so the parent's net income increases by 6. Dividends would reduce the investment balance but not the current period net income.

Under the equity method, when the parent has significant influence (about 20% or more) over a subsidiary, it records its share of the subsidiary’s net income in its own income statement. The amount added to the parent's net income equals the ownership percentage times the subsidiary’s net income. Here, 30% of 20 is 6, so the parent's net income increases by 6. Dividends would reduce the investment balance but not the current period net income.