Question #73
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 32
Status: Unattempted
Question
Mashburn Company acquired 25% of the 100,000 outstanding shares of Humm Co. on January 1 for $250,000 in cash. Humm Co. earned $1 per share and had a dividend payout ratio of 40%. As of December 31, Humm Co. shares were trading in the open market at $12 per share. Calculate the income statement treatment of the Humm Co. investment as of December 31.
Answer Choices:
A. $10,000
B. $75,000
C. $25,000
Explanation
Under the equity method, the investor recognizes its pro-rata share of the affiliate's
income on the income statement. Since Mashburn owns 25,000 shares of Humm and
Humm earned $1, the income statement impact of the investment is $25,000.