Question

On January 2, 2020, Howdy Doody Corporation purchased 15% of Ranger Corporation's common stock for $59,000. Ranger's net income for the years ended December 31, 2020, and December 31, 2021, were $18,000 and $59,000, respectively. During 2020, Ranger declared and paid a dividend of $67,500. On December 31, 2020, the fair value of the Ranger stock owned by Howdy Doody had increased to $68,000. How much should Howdy Doody show in the 2020 income statement as income from this investment

Answer 1

Answer:

Total amount to be shown in income statement as income from this investment is $19,125

Explanation:

Item                                                                              Amount

Dividend received by Howdy Doody corporation    $10,125  

($67,500 x 15%)

Increase in Fair value of Stock credited to                $9,000  

income statement ($68,000-$59,000)

Total amount shown in income statement               $19,125

as income from this investment.

Conclusion: Howdy owns only 15% of the shares in Rangers hence it does not have significant influence so Fair value method for recording investment will be used.  Howdy will record dividend received as income from investment and increase in fair value of investment as well.