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Investment Income for Equity Method Investments

Brian Krogol
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So our next journal entry is for our investment income. The company that we bought shares of is going to be earning net income or it could have a net loss possibly. Right? But let's focus on the net income first when it has net income, well, a percentage of that net income is ours and that's based on our percent ownership. Right? So we saw in this case that we had 40% of the company was owned, so 40% of their net income is ours. So let's go ahead and see how this journal entry is made On december 31st year one small boy company reported net income of 560,000. So this is the company that we bought, right? We bought small boy company 40% of their company and they had net income of 560,000. So 40% of that net income is ours. So let's see how much that comes out to 560,000 times 40% 0.4. Let's find out what that number is. It comes out to 224,000. Okay, so 224,000 is our investment income. But notice what we do in this situation whenever we get investment income, we're gonna increase our investment account by that amount. So what we're gonna do is we're going to debit the equity method investment account which remember this is an asset. So we're increasing the value of the asset by 224,000. We didn't receive cash or anything. Right? This is net income of that company. So we're increasing the value of our asset. This is almost like we're increasing the retained earnings of our asset here. If you think of it as like this subsection of your balance sheet with its own retained earnings, there was this earnings that it had and it's gonna increase the value of this asset. Cool. So the equity method investment is 224,000. And we're going to credit investment income. Okay, this investment income right here, this is going to the income statement. The income statement is gonna show that we earned 224,000 And it's gonna show this as as an income to our company in our non operating section. Right? It'll show this income. Cool. So we saw that our investment increases by 224,000, which is the the amount of the net income attributable to us and let me get out of the way the investment income goes to our income statement and it increases our net income. So it's going to increase our equity by 224,000. Cool. Alright. So notice this is very different than what we were doing when we had our cost method investments in trading securities and available for sale securities and things like that. We never did anything like this. So this is very different. I want you guys to be familiar with this, it's not too difficult. You just have to be uh familiar with these different rules. Okay, so this is what happens with investment income. Let's try investment loss.