Carmen Corporation purchased a 40% interest in Sahara Inc. on January 1, 2017, paying $200,000 for 40% of the outstanding voting stock of Sahara Inc. For its year ended December 31, 2017, Sahara Inc. reported net income of $40,000. On December 31, 2017, Carmen received a dividend payment from Sahara in the amount of $1,000. As a result of its ownership interest in Sahara, the financial statements for Carmen Corporation for the year ended December 31, 2017 will reflect which of the following:

Question

Quizplus · Accepted Answer

Carmen Corporation uses the equity method to account for its investment in Sahara Inc. Under the equity method, Carmen recognizes its share of Sahara's net income as revenue on its own income statement. Since Sahara reported net income of $40,000 for the year and Carmen owns 40%, Carmen would recognize revenue of $16,000 ($40,000 x 40%). The dividend received from Sahara would be reflected in the cash flows from investing activities section of Carmen's statement of cash flows. There would be no asset recorded for the investment, as the investment is already reflected in Carmen's ownership interest in Sahara.

Carmen Corporation Purchased a 40% Interest in Sahara Inc