Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 2014 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2014, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 2014 net income was $52 million. What effect will the dividend have on Phillips' 2010 financial statements?

Question

Quizplus · Accepted Answer

The dividend received by Phillips Corporation will increase their cash and be recorded as investment income, as they hold less than 20% of Martin Corporation's stock and thus do not have significant influence.

Phillips Corporation Purchased 1,000,000 Shares of Martin Corporation's Common Stock