Van Dover 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 Van Dover Company owns 30% of the outstanding shares of Sanchez Company.Sanchez Company's dividend will affect Van Dover 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 Sanchez Company paid dividends to its shareholders, Van Dover Company, as a shareholder, will receive a portion of the dividends on the common stock it owns. Therefore, Van Dover Company's investment in Sanchez Company will decrease by the portion of dividends that it receives. This will result in decreasing investments by $300,000. However, there is no accompanying increase in cash, so choice (C) is the correct one.

Van Dover Company Purchased Common Stock in Sanchez Company