On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.
-Based on the preceding information,what amount will be reported by Yang as income from its investment in Spiel for 20X8 if it used the fair value option to account for its investment in Spiel?
A) $11,250
B) $2,500
C) $6,250
D) $7,500

Question

Quizplus · Accepted Answer

Under the fair value option, the income from the investment is based on the change in fair value. The fair value decreased from $110,000 to $105,000, resulting in a loss of $5,000. Additionally, Yang would recognize its share of dividends received, which is 25% of $30,000, equaling $7,500. Therefore, the net income reported would be $7,500 (dividends) - $5,000 (loss in fair value) = $2,500.

On January 1, 20X7, Yang Corporation Acquired 25 Percent of the Outstanding