Orlov Corporation purchased 8,500 shares of Matsey Corporation common stock for $40 per share on January 1,2009.Matsey reported net income of $120,000 for 2009 and paid dividends of $45,000 during 2009.As of December 31,2009,the market value of Matsey Corporation common stock was $40 per share.Assuming the shares owned by Orlov represent 30 percent of the total outstanding stock of Matsey,Orlov Corporation should report the long-term investment on December 31,2009,at a carrying value of

Question

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Orlov Corporation should report the long-term investment on December 31, 2009, at a carrying value of $362,500. This is because Orlov owns 30% of Matsey's outstanding stock, and Matsey reported net income of $120,000 for 2009. Therefore, Orlov's share of Matsey's net income is $36,000 (30% x $120,000). Orlov also received $13,500 in dividends from Matsey during 2009 (30% x $45,000). Therefore, Orlov's total return on its investment in Matsey for 2009 is $49,500 ($36,000 + $13,500). Orlov's original investment in Matsey was $340,000 (8,500 shares x $40 per share). Therefore, Orlov's carrying value of its investment in Matsey on December 31, 2009, is $362,500 ($340,000 + $49,500).

Orlov Corporation Purchased 8,500 Shares of Matsey Corporation Common Stock