Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2006, Hobbitt earns $80,000 and pays cash dividends of $30,000. For the year ended December 31, 2006 Olivia should report income related to the investment equal to

Question

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Olivia Co. owns 40% of Hobbitt Corp. (4,000 out of 10,000 shares) and exercises significant influence, so it should use the equity method. Under this method, Olivia Co. recognizes 40% of Hobbitt's net income, which is 40% of $80,000, equaling $32,000.

Olivia Co Owns 4,000 of the 10,000 Outstanding Shares of Hobbitt