Jeff Company purchased, as a long-term investment, common stock of Garcia Company.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's net income will affect Jeff Company by _____.
A)increasing cash and investments by $400,000
B)increasing stockholders' equity and investments by $400,000
C)increasing cash and stockholders' equity by $400,000
D)none of these answers is correct

Question

Quizplus · Accepted Answer

Jeff Company's share of Garcia Company's net income would not directly increase Jeff Company's cash, investments, or stockholders' equity by $400,000. Instead, Jeff Company would recognize its share of Garcia's dividends ($100,000, which is 10% of $1,000,000) as income, affecting its cash and potentially its stockholders' equity, but not by $400,000.

Jeff Company Purchased, as a Long-Term Investment, Common Stock of Garcia