Rocky Company acquired 40% of the voting stock of Boulder Company for $40 million.At the end of Year 1,Boulder Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Rocky Company's investment in Boulder Company is $44 million.What accounts on Rocky Company's books would be affected by the net income of Boulder Company?
A)none
B)Investments increase $15 million and Stockholders' equity increases $15 million
C)Cash increases $15 million and Stockholders' equity increases $15 million
D)Investments increase $6 million and Stockholders' equity increases $6 million

Question

Quizplus · Accepted Answer

Rocky Company owns 40% of Boulder Company, so it uses the equity method. Under this method, Rocky's investment increases by 40% of Boulder's net income, which is $6 million (40% of $15 million). This also increases Rocky's stockholders' equity by the same amount.

Rocky Company Acquired 40% of the Voting Stock of Boulder