Randall 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 Randall Company's investment in Boulder Company is $44 million.What accounts on Randall Company's books would be affected by the dividends of Boulder Company?
A) none
B) Cash increase $2 million and Investment Revenue increases $2 million
C) Cash increase $5 million and Investment Revenue increases $5 million
D) Cash increase $2 million and Investments decrease $2 million

Question

Quizplus · Accepted Answer

The dividends received by Randall Company would increase its cash by $2 million (40% of $5 million). This is recorded as a reduction in the Investments account under the equity method, not as Investment Revenue.

Randall Company Acquired 40% of the Voting Stock of Boulder