Parent Co. invested $1,097,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends each year. T-account Balance for Investment in Sub Co. 1,097,000 DR 140,200 DR 56,080 CR
a) How much was Parent Co.'s share of Sub Co.'s net income for the year?
b) How much was Parent Co.'s share of Sub Co.'s dividends for the year?
c) What was Sub Co.'s total net income for the year?
d) What was Sub Co.'s total dividends for the year?
When an investor obtain 20% - 50% from investment, he should account the investment using equity method.
Answer and Explanation:
c. $140,200 / 25% = $560,800
d. $560,800 * 40% = $224,320
Dividends decrease the balance of investment when using equity method. Net Income increases the balance,
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from Finance 305: Risk ManagementChapter 3 / Lesson 3