Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X4 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X4, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X4 net income was $52 million. What effect will the dividend have on Phillips' 20X0 ﬁnancial statements?

Question

Quizplus · Accepted Answer

The dividend from Martin Corporation will increase Phillips Corporation's cash by the amount received ($4,000,000) and will also increase investment income, as dividends from investments are recognized as income in the period they are declared.

Phillips Corporation Purchased 1,000,000 Shares of Martin Corporation's Common Stock