Slide Corporation reported net income for the current year of $370,000 and paid cash dividends of $50,000.Power Company holds 40 percent of the outstanding voting stock of Slide.However,another corporation holds the other 60 percent ownership and does not take Power's input into consideration when making financing and operating decisions for Slide.What investment income should Power recognize for the current year?
A)$0
B)$20,000
C)$128,000
D)$148,000

Question

Quizplus · Accepted Answer

Power Company owns 40% of Slide Corporation's outstanding voting stock, which means it has significant influence over Slide's financial and operating decisions. However, since another corporation owns the majority of voting stock and Power's input is not considered, Power cannot exercise control over Slide. Therefore, Power Company should use the equity method to account for its investment in Slide.
The equity method requires Power to recognize its share of Slide's net income, which is 40% of $370,000 = $148,000. However, dividends paid to shareholders reduce the investment's carrying value on the balance sheet. Since Slide paid dividends of $50,000, Power would only recognize its share of the income that was earned during the year but not distributed as dividends, which is $148,000 - $50,000 = $98,000. Therefore, the correct choice is B ($20,000, which is not one of the options, is incorrect).

Slide Corporation Reported Net Income for the Current Year of $370,000