Herman Company acquired 10 percent of the voting stock of Hudson Company for $10 million.Herman Company plans to keep the investment for several years.At the end of Year 1,Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Herman Company's investment in Hudson Company is $11 million.What entry is necessary at the end of Year 1 to account for the change in market value of Herman Company's investment in Hudson Company?
A)No entry is needed.
B)Cash increases $11 million and Stockholders' equity increases $11 million.
C)Investments increase $11 million and Stockholders' equity increases $11 million.
D)Investments increase $1 million and Stockholders' equity increases $1 million.

Question

Quizplus · Accepted Answer

Since Herman Company owns less than 20% of Hudson Company, it should use the fair value method. The investment increased in market value from $10 million to $11 million, so an adjustment of $1 million is needed to reflect this change.

Herman Company Acquired 10 Percent of the Voting Stock of Hudson