Vince Company purchased common stock in Gill Company.During the current year,Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 40 percent of the outstanding shares of Gill Company.Gill Company's net income will affect Vince Company by ________.
A)increasing investments by $1,600,000
B)increasing investments and cash by $2,000,000
C)increasing cash and stockholders' equity by $400,000
D)increasing cash and decreasing investments by $1,600,000

Question

Quizplus · Accepted Answer

Vince Company owns 40% of Gill Company, which means it has a significant influence on Gill's operations. As such, Vince Company should record its share of Gill's net income, which would be $1,600,000 (40% x $4,000,000). The dividends paid by Gill Company do not affect Vince Company's investment in Gill Company. Therefore, the correct answer is A, which indicates that the net income would increase Vince Company's investment by $1,600,000.

Vince Company Purchased Common Stock in Gill Company