On October 1,20X7,Chicago Corporation purchased 6,000 shares of Buffalo Company's 15,000 outstanding share of common stock for $25 per share.On December 15,20X7,Buffalo paid $120,000 in dividends to its common stockholders.Buffalo's net income for the year ended December 31,20X7 was $300,000,earned evenly throughout the year.In its 20X7 income statement,what amount of income from this investment should Chicago report?

Question

Quizplus · Accepted Answer

Chicago Corporation purchased 6,000 shares out of Buffalo Company's 15,000 outstanding shares. Therefore, Chicago now owns 40% (6,000/15,000) of the outstanding common stock of Buffalo.

Buffalo paid $120,000 in dividends to its common stockholders, which means Chicago received $48,000 ($120,000 x 40%) in dividends.

Chicago's share of the net income of Buffalo for the year ended December 31, 20X7, would be $120,000 ($300,000 x 40%).

Therefore, the total income that Chicago Corporation should report from this investment in Buffalo Company in its 20X7 income statement is $78,000 ($48,000 + $30,000).

On October 1,20X7,Chicago Corporation Purchased 6,000 Shares of Buffalo Company's