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 30% of Gill Company.The dividend paid by Gill Company will affect Vince Company by _____.
A)increasing cash and stockholders' equity by $300,000
B)increasing investments and stockholders' equity by $300,000
C)increasing cash and decreasing investments by $300,000
D)having no effect

Question

Quizplus · Accepted Answer

Since Vince Company owns 30% of Gill Company, the dividend paid by Gill Company will decrease Vince Company's investment in Gill Company by $300,000 (30% of $1,000,000). Therefore, Vince Company's investments will decrease by $300,000 and its cash will increase by $300,000 due to the receipt of the dividend. Consequently, the net effect of the dividend on Vince Company will be an increase in cash and a decrease in investments of $300,000.

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