@turbosandwich, prime example below. I can't tell you how many times I picked A, and the nuance is the date at the beginning of the question.
On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.’s 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, Eagle paid $40,000 in dividends to its common shareholders. Eagle’s net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report?
A. $36,000
B. $18,000
Answer (B) is correct.
Denver Corp.’s purchase of 30% of Eagle presumably allows it to exercise significant influence. Hence, it should apply the equity method. The investor’s share of the investee’s income is a function of the percentage of ownership and the length of time the investment was held. The income from this investment was therefore $18,000 [$120,000 × 30% × (6 months ÷ 12 months)].
C. $12,000
D. $6,000
AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)
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