On January 2, 2008, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2008 and 2009, were $10,000 and $50,000, respectively. During 2009, Ranger declared and paid a dividend of $60,000. There were no dividends in 2008. On December 31, 2008, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2009 income statement as income from this investment?

Question

Quizplus · Accepted Answer

Howdy Doody Corporation should show $7,200 as income from this investment in the 2009 income statement, which is calculated by multiplying the dividend received ($60,000) by the percentage of ownership (12%). The fair value increase in 2008 ($20,000) is not included in the income statement but would be reflected in shareholders' equity. The change in net income of Ranger Corporation in 2009 also does not affect the income statement of Howdy Doody Corporation as it is an available for sale investment.

On January 2, 2008, Howdy Doody Corporation Purchased 12% of Ranger