On January 2, 2012, 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, 2012 and 2013, were $10,000 and $50,000, respectively. During 2013, Ranger declared and paid a dividend of $60,000. There were no dividends in 2012. On December 31, 2012, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2013 income statement as income from this investment?

Question

Quizplus · Accepted Answer

Howdy Doody should recognize dividend income from the investment. Since they own 12% of Ranger and Ranger paid $60,000 in dividends, Howdy Doody's share is 12% of $60,000, which is $7,200. The change in fair value is not recognized in the income statement for available-for-sale securities.

On January 2, 2012, Howdy Doody Corporation Purchased 12% of Ranger