Question

On July 1, Year 4, Fox Corp. purchased 3,000 shares of Owl Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, Year 4, Owl paid $40,000 in dividends to its common stockholders. Owl's net income for the year ended December 31, Year 4, was $120,000, earned evenly throughout the year. In its Year 4 income statement, what amount of income from this investment should Fox report?

Answer 1

Answer:

$18,000

Explanation:

Owl's 1992 income $ 120,000

Percentage owned − 3,000 out of 10,000 shares = 30%

Owned for 6 months (7/1/92 to 12/31/92) = 6/12

Income from investment in Owl

=$120,000 * 30%  * 6/12

=$18,000

NB:

1. The dividends received decrease the investment account, but do not affect the income.

2. In a purchase, income from an investee is acknowledged only from date of purchase.

3. With 30% ownership, important influence is assumed and equity method is used.