Question

On January 1, year 4, Griffin, Inc. purchased 12% of Hydra Co.’s common stock. At that time Griffin did not have the ability to exert significant influence over Hydra. On September 1, year 4, Griffin purchased additional Hydra shares, bringing its ownership up to 35% of Hydra’s common stock outstanding. During December year 4, Hydra declared and paid a cash dividend on all of its outstanding common stock. Griffin uses the equity method to account for its investment in Hydra. How much income from the Hydra investment should Griffin’s year 4 income statement report?

Answer 1

Answer:

Only 35% of the dividend arising from September to December, 2014 would be recognized as revenue in the income statement.

Explanation:

The remainder of the income is not relevant as it was accounted for under the market value method because the share holding was below the associate shareholding. Under the market value method, gain and losses on the increase and decrease of market value of investment are recognized in the comprehensive income statement.

The equity method says that the income from the investment is only recognized if the shareholding is above the shareholding requirement of associate. So from the month the investment was considered as an associate investment which is September, 2014 and onwards, the firm must recognize dividends received from this date as an income in its financial statement.