Suppose Rock Company acquires 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 to reflect the year-end market value and by how much?
A)There is no entry and no effect.
B)Cash would increase by $44 million and Stockholders' Equity would increase by $44 million.
C)Investments would increase by $44 million and Stockholders' Equity would increase by $44 million.
D)Investments would increase by $4 million and Stockholders' Equity would increase by $4 million.

Question

Quizplus · Accepted Answer

Under the equity method of accounting, which is typically used when an investor has significant influence over the investee (ownership of 20% to 50% of voting stock), the investor recognizes its share of the investee's earnings and dividends received as adjustments to the carrying amount of the investment. The market value of the investment at the end of the year does not affect the accounting records of the investor. Therefore, there is no entry required to adjust for the year-end market value of the investment in Hudson Company on Rock Company's books.

Suppose Rock Company Acquires 40% of the Voting Stock of Hudson