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An investor owns 25% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor's balance sheet at $1,500,000. During the year, the investee reported net income of $600,000 and paid dividends of $150,000. In addition, the investor sold inventory to the investee, realizing a gross profit of $180,000 on the sale. At the end of the year, 30% of the inventory remained unsold by the investee.

a. Provide the equity method journal entries required for the year

Description	Debit	Credit
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment	Answer	Answer
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment	Answer	Answer
To record the recognition of equity income.
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment	Answer	Answer
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment	Answer	Answer
To record deferred profits in ending inventory.
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment	Answer	Answer
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment	Answer	Answer
To record receipt of dividends.

b. What is the balance of the Equity Investment at the end of the year?

$Answer

c. Assume that the inventories are all sold in the following year, that the investee reports $675,000 of net income. How much equity income will the investor report for the following year?

$Answer

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