Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2014. On December 31, 2014, Click It paid a $1 million cash dividend declared earlier in 2014 and reported net earnings for the year ended 2014 of $10 million. On December 31, 2014, Click Its stock was trading at $11.50 per share. What effect will the dividend have on Photo Finish's financial statements?

Question

Quizplus · Accepted Answer

The dividend received by Photo Finish will increase cash and decrease the investment in Click It, as dividends are considered a return on investment, reducing the carrying amount of the investment under the equity method.

Photo Finish Corporation Bought a 40% Interest in the Voting