On April 30, 20X4, Huge Inc. established a 100%-owned subsidiary known as Tiny Inc. Huge invested $550,000 in the shares of Tiny. Tiny has no other shares outstanding. Since its establishment, Tiny has had the following earnings and paid the following dividends:

Required

a. Determine the amount of Tiny Inc.€™s earnings that will be reported as investment income by Huge Inc. in 20X7, under the equity method.

b. Calculate the balance of the investment in Tiny Inc. account on Huge Inc.€™s books at December 31, 20X7, assuming that Huge Inc. maintains the investment account on the equity basis.

c. Provide the adjusting entry Huge Inc. will have to make on December 31, 20X7, if it uses the cost method to record and the equity method to report its investment in Tiny Inc.

Transcribed Image Text:

Dividends Year Net Income (Loss) ($60,000) 20X4 $ 18,000 42,000 54,000 20X5 70,000 46,000 110,000 20X6 20X7 Total $166,000 $114,000