Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment.Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1,2008.How much income should Gaw recognize on this investment in 2008?

Question

Quizplus · Accepted Answer

Under fair-value method, the investor recognizes its share of the investee's net income as income. Thus, Gaw should recognize 15% of Trace's net income of $110,000, which is $16,500. However, Gaw only receives 15% of the dividends paid, which is $9,000. Therefore, the income recognized on this investment in 2008 is $9,000.

Gaw Company Owns 15% of the Common Stock of Trace