XYZ Corporation owns 25% of ABC Ltd. During the year, ABC reported a net income of $400,000. How should ABC account for its share of this income, and what journal entries should be made?

ABC Ltd should account for its share of income from XYZ Corporation as follows:

1. Calculate the share of income: $400,000 x 25% = $100,000

2. Record the share of income in ABC Ltd's books:
Debit: Investment in XYZ Corporation (Asset) - $100,000
Credit: Equity in Earnings of XYZ Corporation (Revenue) - $100,000

This journal entry reflects ABC Ltd's share of income from its investment in XYZ Corporation.

Accounting for Equity Method Investment

Under the equity method, XYZ Corporation should account for its 25% ownership in ABC Ltd. as an investment. The investment account will be adjusted to reflect the share of net income earned by ABC during the year.

Journal Entries

1. To record XYZ Corporation's share of ABC Ltd.'s net income:

Debit: Investment in ABC Ltd. $100,000
Credit: Equity Income $100,000

- Calculation: 25% x $400,000 = $100,000

This entry records the recognition of XYZ Corporation's share of ABC Ltd.'s net income.

2. To close the Equity Income account to Retained Earnings:

Debit: Equity Income $100,000
Credit: Retained Earnings $100,000

This entry closes the temporary Equity Income account and transfers the net income to Retained Earnings.