Detailed Answer
(b) This investment should be accounted for using the
equity method since Grant owns a 30% interest and can exercise
significant influence over South. Grant’s share of South’s year 1
earnings (30% × $80,000 = $24,000) would be recognized as
investment revenue under the equity method. If there was any
excess of cost over book value of assets with finite useful lives,
resulting from the purchase of the investment, it would be amortized,
reducing investment revenue. However, not enough information
was given to determine if there was an excess. The
dividends received by Grant (30% × $50,000 = $15,000) do not
affect investment revenue using the equity method; they are recorded
as a reduction of the investment account.