Why are dividends not accounted for?

  • Creator
    Topic
  • #196015
    Kairos
    Participant

    The answer is b) $42,000

    48000-4000-2000

    The figures are from multiplying net income by .4 and then subtracting the excesses of the plant and inventory (2000 and 4000). Why are the dividends not subtracted as well?

    Thanks!

    Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, 20X3, for $400,000. The carrying amount of Adams’ net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an eighteen-year life. All inventory was sold during 20X3. During 20X3, Adams reported net income of $120,000 and paid a $20,000 cash dividend. Assume that Sage uses the equity method to account for this investment. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31, 20X3?

    a

    $48,000

    b

    $42,000

    c

    $36,000

    d

    $32,000

Viewing 6 replies - 1 through 6 (of 6 total)
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  • #687293
    Kairos
    Participant

    And just to compare it with this problem where the answer is b) 435,000

    and here, dividends are accounted for and subtracted from net income. Is it because in the problem above, they are asking for what was reported in the income statement and for this one, they are asking for what is reported in the balance sheet?

    On January 2, 20X3, Well Co. purchased 10% of Rea, Inc.’s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well’s officers are a majority on Rea’s board of directors. Rea reported net income of $500,000 for 20X3, and paid dividends of $150,000. Well does not elect the fair value option to report its investment in Rea. In its December 31, 20X3 balance sheet, what amount should Well report as investment in Rea?

    a

    $450,000

    b

    $435,000

    c

    $400,000

    d

    $385,000

    #687294
    Anonymous
    Inactive

    Under the equity method, dividends reduce the investment account and not investment earnings.

    And yes, the second question asks for the investment account balance. You start with cost of $400,000, add 10% of earnings, and subtract 10% of dividends.

    $400,000 + 50,000 – 15,000 = $435,000.

    The first question asks for investment income, which is just the percentage share of income +/- any fair value adjustments being amortized.

    #687295
    Anonymous
    Inactive

    @Kairos I am on the same homework as you… if you are down for a study buddy please let me know

    my FAR test is Aug 27

    #687296
    Kairos
    Participant

    Thanks BobRobbins

    @Chickie8565 yea i wouldn't mind having a study buddy. Are you on marketable securities?

    #687297
    Anonymous
    Inactive

    @Kairos

    hey you!!! still down for a study buddy

    #687298
    Kairos
    Participant

    @Chickie8565

    yea sure, going through foreign operations atm. what section are you on?

Viewing 6 replies - 1 through 6 (of 6 total)
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