On January 1 st , 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC's managerial involvement, for $600,000. On that date, DEF's net assets had a fair value equivalent to their book values.
During 2011 and 2012, DEF Inc. earned income and paid dividends as follows:
$\begin{array}{|l|l|l|}
\hline & \text { Income } & \text { Dividends } \
\hline 2011 & \$ 120,000& \$ 20,000 \
\hline 2012 & \$ 180,000& \$ 30,000 \
\hline
\end{array}$

-Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABC's 2012 income as a result of this investment?

Question

On January 1 st , 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC's managerial involvement, for $600,000. On that date, DEF's net assets had a fair value equivalent to their book values.
During 2011 and 2012, DEF Inc. earned income and paid dividends as follows:
$\begin{array}{|l|l|l|}
\hline & \text { Income } & \text { Dividends } \
\hline 2011 & \$ 120,000& \$ 20,000 \
\hline 2012 & \$ 180,000& \$ 30,000 \
\hline
\end{array}$

-Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABC's 2012 income as a result of this investment?

Quizplus · Accepted Answer

Under the cost method, an investor recognizes income from an investee only to the extent of dividends received from the investee. In 2012, DEF Inc. paid dividends of $30,000. Since ABC Inc. owns 30% of DEF, it would recognize 30% of $30,000 as dividend income, which is $9,000.

On January 1st, 2011, ABC Inc -Assuming That ABC Adheres to ASPE and Opts to Use

On January 1^st, 2011, ABC Inc -Assuming That ABC Adheres to ASPE and Opts to Use