Anchor Co. owns 40% of Main Co.’s common stock outstanding and 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?
A. 75,000
B. 80,000
C. 200,000
D. 225,000
Answer A. Since Anchor owns 40% of the common stock of Main, it will apply the equity method of accounting. As a result, it will recognize 40% of Main’s income attributable to common stockholders in income. Dividends are recognized as a reduction of the investment, not dividend income. An investment in preferred stock is accounted for as trading or available for sale, if marketable, and under the cost method if not. In either case, dividends are recognized as income. Anchor will receive 75% of the preferred dividends or $75,000, which will be recognized as dividend income.
I don’t understand what happens to the 40% and 200,000. Why is dividend income only recognized on the $100,000 @ 75%?
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