Ramon 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 Ramon Company's investment in Boulder Company is $44 million.What accounts will be affected on Ramon Company's books to account for the increase in market value of the investment at the end of Year 1?
A) none
B) Cash increase $44 million and Stockholders' Equity increase $44 million
C) Investments increase $44 million and Stockholders' Equity increase $44 million
D) Investments increase $4 million and Stockholders' Equity increase $4 million

Question

Quizplus · Accepted Answer

Under the equity method of accounting, which is likely used here given the significant influence implied by a 40% ownership, the increase in market value of the investment does not affect the accounting records. Only the share of Boulder's net income and dividends paid would be recorded, not changes in market value.

Ramon Company Acquired 40% of the Voting Stock of Boulder