Detailed Answer
Answer (C) is correct. Because the investor can exercise significant influence over the investee’s operating and financial policies, the investment should be accounted for using the equity method. The $700,000 paid for the investment is equal to 20% of the $3.5 million fair value. Moreover, the carrying amount and fair value of the net assets were the same. Thus, no goodwill impairment or other acquisition differential that might require adjustment of Dyer’s share of the investee’s net income is associated with this investment. Under these circumstances, revenue from the investment is 20% of the reported net income of $400,000, or $80,000. The cash dividend does not affect the amount of income to be reported.