Rock Company acquired 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 at the time they acquire Hudson Company's stock and by how much?
A) Accounts Payable would decrease by $40 million and Investments would increase by $40 million.
B) There is no entry and no effect.
C) Cash would decrease by $40 million and Investments would increase by $40 million.
D) Cash would decrease by $40 million and Stockholders' Equity would increase by $40 million.

Question

Quizplus · Accepted Answer

When Rock Company acquires 40% of Hudson Company's stock, it pays $40 million in cash, which decreases the Cash account by $40 million. The investment is recorded as an asset, increasing the Investments account by $40 million.

Rock Company Acquired 40% of the Voting Stock of Hudson