GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR's investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX?

Question

Quizplus · Accepted Answer

Under the cost method, the investment in NMX is initially recorded at cost, which is equal to the amount paid to acquire the investment (in this case, 80% of the cost). Any dividends received from NMX would be recorded as a reduction in the investment balance. Therefore, GNR’s investment in NMX account would be reduced by $7,200 (80% x $9,000), resulting in no effect on the investment balance.

GNR Inc Owns 100% of NMX Inc