Question #26
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 10
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2008, is $48,000. In 2009, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is:
Answer Choices:
A. $15,000
B. $12,000
C. $3,000
Explanation
Because company X exerts significant influence over company S, the investment will be
treated using the equity method, even though the ownership is less than the 20%
guideline. The impact on the income statement is the proportionate income of company S,
which is 0.15 × 100,000 = 15,000.