Suppose Rock Company acquires 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. What accounts would be affected on Rock Company's books to reflect the year- end market value and by how much?
A) Investments would increase by $4 million and Stockholders' Equity would increase by $4 million.
B) There is no entry and no effect.
C) Investments would increase by $44 million and Stockholders' Equity would increase by $44 million.
D) Cash would increase by $44 million and Stockholders' Equity would increase by $44 million.

Question

Quizplus · Accepted Answer

Rock Company uses the equity method for its investment in Hudson Company, as it owns 40% of the voting stock. Under the equity method, the investment is adjusted for Rock's share of Hudson's net income and dividends, not market value changes. Therefore, there is no entry to reflect the year-end market value.

Suppose Rock Company Acquires 40% of the Voting Stock of Hudson