Question

Rochester Corp. holds a 15% equity investment in LaCrosse Inc. Reedsburg Investments holds 45% of LaCrosse’s stock. On October 1, 2017, LaCrosse declares and pays dividends to its stockholders. How will the dividend affect each company’s net income for the year? Select one: A. Rochester Reedsburg No effect Increase B. Rochester Reedsburg No effect No effect C. Rochester Reedsburg Increase No effect D. Rochester Reedsburg Increase Increase E. There is not enough information to determine the effect. Clear my choice

Answer 1

Answer:

Correct Option is B) Rochester Income Increase, Reedsburg Income No effect

Explanation:

As per IFRS,

When a company holds share of any company up to 20% then it is an associate, and in this case Rochester holds only 15% and thus will increase its net income with dividend received. (Cost method is followed)

When a company holds more than 20 % and less than 50% then the equity method is followed until and unless major significance is not exercised, generally it is exercised. In that case equity method is followed, and any income received is adjusted from cost of investment, and do not form part of income.