Vince Company purchased common stock in Sanchez Company.During the current year,Sanchez Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 30% of the outstanding shares of Sanchez Company.Sanchez Company's dividend will affect Vince Company by ________.
A)increasing cash and stockholders' equity by $300,000
B)increasing investments and stockholders' equity by $300,000
C)increasing cash and decreasing investments by $300,000
D)increasing cash and increasing investments by $300,000

Question

Quizplus · Accepted Answer

Since Vince Company owns only 30% of Sanchez Company, it will receive only 30% of the dividends paid by Sanchez Company. Thus, the dividend received by Vince Company will be $1,000,000 x 30% = $300,000. This will increase its cash balance by $300,000, but decrease its investment in Sanchez Company by the same amount. Therefore, the correct answer is C: increasing cash and decreasing investments by $300,000.

Vince Company Purchased Common Stock in Sanchez Company