Question

On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.�s 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, Eagle paid $40,000 in dividends to its common shareholders. Eagle�s net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report?
$36,000
$18,000
$12,000
$6,000

Answer 1

Answer:

$18,000

Explanation:

On July 1, Year 1

Denver Corp. invested in E company holding:

= (3,000 ÷ 10,000) × 100

= 30% of share

Hence, the period of holding as on December 31, Year 1 is 6 months.

Net income for E co. for the year ended December 31, Year 1 = $120,000

Amount of income from this investment should Denver report:

= $120,000 × 30% × (6/12)

= $18,000