Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, Ashley will recognize what amount of 2005 income from the investment?

Question

Quizplus · Accepted Answer

As per the equity method, the investment income is recognized as a proportion of the investee company's net income. In this case, Ashley Company owns 20% (2,000/10,000) of Judd, Inc.'s outstanding stock, making it a minority, active investment. Therefore, Ashley Company's share of Judd, Inc.'s net income for the year 2005 will be (20% x $75,000) = $15,000. This amount will be recognized as investment income on Ashley Company's books. The increase in market value of the stock does not affect the equity method calculation of investment income. Thus, option D is the correct answer.

Ashley Company Purchased 2,000 of the 10,000 Outstanding Shares of Judd