Orlov Corporation purchased 8,000 shares of Matsey Corporation common stock for $40 per share on January 1,2012.Matsey reported net income of $110,000 for 2012 and paid dividends of $45,000 during 2012.As of December 31,2012,the market value of Matsey Corporation common stock was $40 per share.Assuming the shares owned by Orlov represent 30 percent of the total outstanding stock of Matsey,the entry to record the recognition of income by Orlov Corporation is:

Question

Quizplus · Accepted Answer

Orlov Corporation owns 30% of Matsey Corporation's outstanding stock, so they are entitled to recognize 30% of Matsey's net income and dividends. The market value of Matsey's stock is irrelevant for this entry. Therefore, the entry to recognize Orlov's income from their investment in Matsey Corporation is to debit Investment in Matsey Corporation for $33,000 (30% of $110,000) and credit Income, Matsey Corporation Investment for $33,000 (30% of $45,000). Choice (A) is incorrect because it only records the dividends received, not the net income recognized. Choice (B) is incorrect because it records the full amount of Matsey's net income, not just Orlov's share. Choice (D) is incorrect because it records a transaction between Orlov and themselves, rather than recognizing the income from the Matsey investment.

Orlov Corporation Purchased 8,000 Shares of Matsey Corporation Common Stock