_____ On 1/1/06, Pongo acquired 66 2/3% of Songo's outstanding common stock for $500,000 cash. On 1/2/06 (one day later), Songo declared and paid a cash dividend of $150,000 (as instructed by Pongo). For 2006, Songo reported $240,000 of net income. For 2006, Pongo had no amortization of cost in excess of book value. What did the parent earn on its investment in 2006?

Question

Quizplus · Accepted Answer

Pongo's earnings from its investment in Songo for 2006 include its share of Songo's net income and the dividend received. Pongo owns 66 2/3% of Songo, so it would claim 66 2/3% of Songo's $240,000 net income, which is $160,000. The dividend of $150,000 paid right after the acquisition does not affect the calculation of earnings from the investment for the year because it's a return of capital, effectively reducing the investment cost to $350,000 ($500,000 - $150,000). However, the return on investment is calculated based on the initial investment amount, not the adjusted amount after receiving the dividend. Therefore, the correct calculation for the return on investment should be based on the initial $500,000 investment, leading to a mistake in the selection of the correct answer. Given the options and the context provided, without considering the dividend adjustment, the calculation for the return would typically be based on the earnings ($160,000) divided by the initial investment ($500,000), but none of the provided options accurately reflect this scenario based on the standard approach to calculating return on investment. The explanation aimed to clarify the calculation but inadvertently selected an option (D) that does not align with the standard calculation method (earnings divided by the initial investment cost).

_____ on 1/1/06, Pongo Acquired 66 2/3% of Songo's Outstanding