Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share.
-What effect will the dividend have on Photo Finish's financial statements?
A) It would increase cash and increase investment income.
B) It would increase cash and decrease investment in Click It.
C) It would increase cash and increase net unrealized gains/losses.
D) It would increase cash and increase the allowance to value at market account.

Question

Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share. 
-What effect will the dividend have on Photo Finish's financial statements?
A) It would increase cash and increase investment income.
B) It would increase cash and decrease investment in Click It.
C) It would increase cash and increase net unrealized gains/losses.
D) It would increase cash and increase the allowance to value at market account.

Quizplus · Accepted Answer

The dividend from Click It will increase Photo Finish's cash because they receive $1 million in dividends. However, under the equity method of accounting, dividends received from an investee reduce the carrying amount of the investment. Therefore, the investment in Click It on Photo Finish's balance sheet would decrease by the amount of the dividend received.

Photo Finish Corporation Bought a 40% Interest in the Voting