Question

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. Green's 30% ownership of common stock gives it significant influence over Axel.
In 2004, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations.
What amount of dividend revenue should Green report in its Income Statement for the year ended December 31, 2004?

Answer 1

Answer:

$60,000

Explanation:

Green must only report the $60,000 received as preferred stock dividends since it owns 100% of the preferred stocks.

Since Green exercises significant influence over Axel, it will use the equity method. The equity method records common stock dividends as return of capital, not income. All the dividends received ($100,000 x 30% = $30,000) should reduce the investment account on Green's balance sheet.