Question

Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2018 and paid dividends of $60,000 on October 1, 2018. How much income should Gaw recognize on this investment in 2018? g

Answer 1

Answer:

$9,000

Explanation:

As Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment, Gaw company will receive the 15% portion of the dividend paid by Trace company in 2018 irrespective of what net income Trace reported in 2018.

Therefore, Gaw company should recognize 15% of $60,000 = $60,000 × 0.15 = $9,000 income on this investment in 2018.