Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30,2010 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2010,Martin paid a $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and their reported 2010 net income was $52 million.What effect will the dividend have on Phillips' 2010 financial statements?

Question

Quizplus · Accepted Answer

The dividend is reported as investment (dividend) income under the fair value method of accounting for investments. Passive investments are usually less than 20% of the voting stock, are reported on the balance sheet at fair market value, and are accounted for using the fair value method.

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