Question

On July 1, 1992, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, 1992, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December 31, 1992, was $120,000, earned evenly throughout the year. In its 1992 income statement, what amount of income from this investment should Denver report?

Answer 1

Answer:

Amount reported in Income Statement from investment in Eagle Co. = $18,000

Explanation:

Shares purchase date = 1 July 1992

Number of shares = 3,000

Total shares = 10,000

Percentage of holding = 3,000/10,000 = 30%

Cost of shares = 3,000 $\times$ $20 = $60,000

Provided dividend received on Dec 15 1992

That is dividend for the year = $40,000

Dividend per share = $40,000/10,000 = $4 per share

Dividend on 3,000 shares = 3,000 $\times$ $4 = $12,000

This will be deducted from cost as dividend received from a company in which share holding is 20% or more than equity method is applied and thus, cost will be $60,000 - $12,000 = $48,000

Further provided Eagle Co's income for the year = $120,000

Shares purchased and held for 6 months

Share of income = $120,000\: \times \: \frac{3,000}{10,000}\: \times\: \frac{6}{12} = 18,000$

This shall be added to cost and also the income statement, of the Denver Corp.

Carrying value of Eagle's Shares = $48,000 + $18,000 = $66,000

Final Answer

Amount reported in Income Statement from investment in Eagle Co. = $18,000