Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation's common stock on January 1,2013,but was not able to exercise significant influence over Lilypad.During 2014,Jacana reported income of $120,000,excluding its income from Lilypad,and paid dividends of $50,000.Lilypad reported net income of $40,000 during 2014 and paid dividends of $20,000.Jacana should report net income for 2014 in the amount of

Question

Quizplus · Accepted Answer

Since Jacana Corporation cannot exercise significant influence over Lilypad Corporation, the investment is accounted for using the cost method. Under this method, Jacana recognizes income from Lilypad only to the extent of dividends received. Jacana's share of Lilypad's dividends is 25% of $20,000, which is $5,000. Therefore, Jacana's net income for 2014 is its own income of $120,000 plus the $5,000 from Lilypad's dividends, totaling $125,000.

Jacana Corporation Paid $200,000 for a 25% Interest in Lilypad