1. Define the equity method (5 points)
2. Use the following example to describe the equity method (12 points)

Presume that

• Company A bought 30% of Company Bs outstanding common stocks at $400,000 (cash) on 01/01/2020
• During 2020, Company B earned net income of $200,000 and paid dividends of $40,000

Provide the journal entries for this equity investment in fiscal year 2020

What is the balance for this equity investment on 12/31/2020?

3. Explain why the accounting numbers obtained using the equity method are misleading (8 points)