Question

On January 2, 2018, Howdy Doody Corporation purchased 15% of Ranger Corporation's common stock for $58,000. Ranger's net income for the years ended December 31, 2018 and 2019, were $15,000 and $58,000, respectively. During 2018, Ranger declared and paid a dividend of $61,500. On December 31, 2018, the fair value of the Ranger stock owned by Howdy Doody had increased to $73,000. How much should Howdy Doody show in the 2018 income statement as income from this investment?

Answer 1

Answer:

Howdy Doody show in the 2018 income statement as income from this investment is $24225

Explanation:

given data

purchased = 15%

common stock = $58,000

net income 2018 = $15,000

net income 2019 = $58,000

dividend  = $61,500

fair value = $73,000

to find out

How much Howdy Doody show in the 2018 income statement as income from this investment

solution

we know that net income to be reported as income by investment is the sum of income from dividend + unrealised gain

so here

unrealised gain = increase in value of stock that is

= $73,000 - $58,000 = $15000      .............1

and

income from dividend is  = 15 % of $61,500

income from dividend = $9225       .................2

now add equation 1 and 2

Howdy doody show in 2018 income statement as income from this investment = Dividend revenue + Unrealized holding gain

income statement = $9225 + $15000

income statement = $24225