On January 1, 2014, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities. During 2014, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 2014 from the Rocker investment?

Question

Quizplus · Accepted Answer

Since Entertainment Company owns less than 20% of Rocker Company, it should use the cost method. Under this method, the income reported is based on dividends received. Entertainment Company would report 15% of the dividends declared and paid, which is 15% of $250,000, equaling $37,500.

On January 1, 2014, Entertainment Company Acquired 15% of the Outstanding