Question

Johnson Inc. purchases 21% of the voting stock of XYZ Company. This is sufficient to give Johnson significant influence over XYZ. If Johnson elects to apply fair-value accounting to this investment, then any dividends XYZ pays to Johnson will be _________ treated as an addition to the Investment in XYZ account treated as a reduction to Goodwill treated as dividend income to Johnson treated as a reduction to the Investment in XYZ acc

Answer 1

Answer:

dividend income to Johnson treated as a reduction to the Investment in XYZ acc

Explanation:

It will debit cash by the amount to be received and credit his investment by the same value. The reasoning is that Johnson decides to distribute the dividends as it has significant influence over XYZ. Thus, it is not earnings. It is just moving cash from one place to another.