Question

On July 1, Year 1, a corporation purchased 3,000 shares of E Co.âs 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, E paid $40,000 in dividends to its common shareholders. Is net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should the corporation report?(A) $36,000(B) $18,000(C) $12,000(D) $6,000

Answer 1

Answer:

C: $12000

Explanation:

The corporation purchase 3000 shares of E Co. while outstanding shares of the corporation was 10000 shares. The corporation did not adopt the fair value option hence dividend income will consider as income from investment for the corporation. The ratio of total dividend share is 3000/10000 = 30% of investment income.

Hence, E Co. paid dividend of $40000 x 30% = $12000 Income from investment for the corporation.