King Company purchased 30% of Andei Company for $2,500,000 at the beginning of the current year.Andei earned $400,000 and declared and paid $300,000 of dividends during the current year.Which of the following correctly describes the effect of these transactions on the statement of cash flows of King Company prepared under the indirect method? Operating Activities Investing Activities

Question

Quizplus · Accepted Answer

Since King Company purchased only a minority interest (30%) in Andei Company, it is accounted for using the equity method. Therefore, the initial investment of $2,500,000 is recorded as an investment in the balance sheet and there is no impact on the statement of cash flows. The $400,000 earnings from Andei Company are included in operating activities under the equity method as "Share of earnings from investment in Andei Company." The $300,000 of dividends received from Andei Company is also included in operating activities under the equity method as "Dividends received from Andei Company." Therefore, there is a decrease of $30,000 in operating activities and a decrease of $2,500,000 in investing activities due to the purchase of the investment.

King Company Purchased 30% of Andei Company for $2,500,000 at the Beginning