Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 40% of Gill Company.Gill Company's net income will affect Vince Company by _____.
A)increasing investments by $1,600,000
B)increasing cash and stockholders' equity $400,000
C)increasing cash and investments by $2,000,000
D)having no effect

Question

Quizplus · Accepted Answer

BVince Company owns 40% of Gill Company, so it would recognize 40% of Gill's earnings as an increase in the investment account, which is $1,600,000 (40% of $4,000,000). Additionally, Vince would recognize its share of dividends received ($400,000, which is 40% of $1,000,000) as an increase in cash and a decrease in the investment account, not affecting stockholders' equity directly.

Vince Company Purchased Common Stock of Gill Company as a Long-Term