On January 1, 2011, the Hammer Company paid $1,300,000 to purchase 35% of the outstanding stock of the Anvil Corporation. Anvil Corporation reports $425,000 of net income for the year ending December 31, 2011 and pays a cash dividend of $115,000 during 2011. On January 1, 2012, the Hammer Company sells its entire investment in the Anvil Corporation for $1,500,000. The Hammer Company will report a(n):

Question

Quizplus · Accepted Answer

The realized gain on the sale will be the difference between the selling price of $1,500,000 and the investment cost of $1,300,000, which is $200,000. However, the dividends received during 2011 will reduce the gain to $85,000 ($200,000 - $115,000), resulting in a realized gain on the sale of $91,500. Therefore, choice C is the correct answer.

On January 1, 2011, the Hammer Company Paid $1,300,000 to Purchase