Desmond Corporation owns 3,500 of the 10,000 outstanding ordinary shares of Wetmore Corporation. During 2014, Wetmore earned £2,400,000 and paid cash dividends of £800,000. What balance should Desmond report on its December 31, 2014 statement of financial position for the investment account if the beginning of the year balance in the account was £3,200,000?

Question

Quizplus · Accepted Answer

Desmond Corporation owns 3,500/10,000 = 35% of Wetmore Corporation.
Therefore, it would record 35% of Wetmore's net income and dividends as follows:
Net income = £2,400,000 x 35% = £840,000
Dividends received = £800,000 x 35% = £280,000
The balance on the investment account at the end of the year would be:
Beginning balance = £3,200,000
Add: Share of net income = £840,000
Less: Dividends received = (£280,000)
Ending balance = £3,760,000

Desmond Corporation Owns 3,500 of the 10,000 Outstanding Ordinary Shares