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 reported its earnings and by how much?
A) Investments would increase by $15 million and Stockholders' Equity would increase by $15 million.
B) Investments would increase by $6 million and Stockholders' Equity would increase by $6 million.
C) There is no entry and no effect.
D) Cash would increase by $15 million and Stockholders' Equity would increase by $15 million.

Question

Quizplus · Accepted Answer

Rock Company owns 40% of Hudson Company, so it uses the equity method. Under this method, Rock Company would recognize 40% of Hudson's net income, which is $6 million (40% of $15 million), increasing the Investment account and Stockholders' Equity by $6 million.

Rock Company Acquired 40% of the Voting Stock of Hudson