_____ On 7/1/06, Payco acquired 100% of Sayco's outstanding common stock when its Retained Earnings were $200,000. For the six months ended 12/31/06, Sayco reported net income of $50,000 and declared dividends of $60,000. Under the equity method, what amount should the parent report in its 2006 income statement?

Question

Quizplus · Accepted Answer

Given that Payco acquired 100% of Sayco's outstanding common stock on 7/1/06, Payco would recognize its share of Sayco's net income and dividends declared after the acquisition date. Since Payco owns 100% of Sayco, it would recognize 100% of the net income and dividends.
Sayco's net income for the six months ended 12/31/06 is $50,000. Payco would recognize this entire amount in its income statement. However, Sayco also declared dividends of $60,000. Under the equity method, dividends received from the investee are treated as a return of investment and reduce the carrying value of the investment on the investor's books, but they do not affect the investor's income statement directly.
Therefore, the amount that Payco should report in its 2006 income statement related to Sayco's operations is the net income attributable to Payco, which is $50,000. The dividends declared would reduce the investment account on Payco's balance sheet but would not be reflected in the income statement.
The correct answer is:
C) $50,000

_____ on 7/1/06, Payco Acquired 100% of Sayco's Outstanding Common