Rock Company acquired 10% of the voting stock of Hudson Company for $10 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 $11 million. What accounts would be affected on Rock Company's books to reflect the year- end market value and by how much?
A) Cash would increase by $11 million and Stockholders' Equity would increase by $11 million.
B) There is no entry and no effect.
C) Investments would increase by $1 million and Stockholders' Equity would increase by $1 million.
D) Investments would increase by $11 million and Stockholders' Equity would increase by $11 million.

Question

Quizplus · Accepted Answer

Rock Company would adjust the investment to its fair value at year-end. The investment's market value increased from $10 million to $11 million, so Investments would increase by $1 million, and Stockholders' Equity would increase by $1 million to reflect the unrealized gain.

Rock Company Acquired 10% of the Voting Stock of Hudson