On July 1,20X4,Denver Corp.purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share.On December 15,20X4,Eagle paid $40,000 in dividends to its common stockholders.Eagle's net income for the year ended December 31,20X4,was $120,000,earned evenly throughout the year.In its 20X4 income statement,what amount of income from this investment should Denver report?
A) $12,000
B) $36,000
C) $18,000
D) $6,000

Question

Quizplus · Accepted Answer

Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock, which represents a 30% ownership interest in Eagle Co. ($3,000/$10,000 = 30%).

Eagle Co. paid a total of $40,000 in dividends to its common stockholders, of which Denver Corp. is entitled to receive 30% or $12,000 ($40,000 x 30% = $12,000).

Denver Corp. also has an ownership interest in Eagle Co.'s net income for the year ended December 31, 20X4, which is calculated as 30% of the $120,000 net income or $36,000 ($120,000 x 30% = $36,000).

Since Denver Corp. earned income from its investment in Eagle Co.'s common stock only for half the year (July 1 to December 31), the income it should report on its income statement for the year ended December 31, 20X4, is half of the income earned from the investment, or $18,000 ($12,000 in dividends + $36,000 in net income x 50% = $18,000).