Ashley Company Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd,Inc.'s common stock for $60,000 on January 1,2010.During 2010,Judd declared a dividend of $5 per share and reported net income of $75,000.At the end of 2010 the market value of a share of Judd,Inc.stock has increased to $32 per share.
If Ashley Company accounts for the investment as a minority,active investment and uses the equity method to account for the investment,Ashley will recognize what amount of 2010 income from the investment?

Question

Quizplus · Accepted Answer

Under the equity method, the investor recognizes their share of the investee's net income and dividends declared. Since Ashley purchased 2,000 shares out of 10,000 outstanding shares, they own a 20% interest in Judd, Inc. Therefore, Ashley's share of Judd's net income for 2010 is $75,000 x 20% = $15,000. Dividends declared by Judd are not relevant for calculating income under the equity method, as dividends do not affect the investor's ownership percentage. The increase in the market value of Judd's stock is also not relevant for income recognition under the equity method.

Ashley Company Ashley Company Purchased 2,000 of the 10,000 Outstanding