Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time Hudson Company paid its dividends and by how much?
A)There is no entry and no effect.
B)Cash would increase by $2 million and Stockholders' Equity would increase by $2 million.
C)Cash would increase by $5 million and Stockholders' Equity would increase by $5 million.
D)Cash would increase by $2 million and Investments would decrease by $2 million.

Question

Quizplus · Accepted Answer

When Hudson Company pays dividends, Rock Company, holding 40% of the voting stock, would receive 40% of the $5 million dividends, which equals $2 million. This increases Rock's Cash account. The decrease in the Investments account reflects the receipt of dividends, which reduces the carrying value of the investment under the equity method.

Rock Company Acquired 40% of the Voting Stock of Hudson