Question

Anchor Co. owns 40% of Main Co.’s common stock outstanding and 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?

A. 75,000
B. 80,000
C. 200,000
D. 225,000

Answer 1

A. 75,000

Step-by-step explanation:

Where an investment is made of 20% or more and there is significance influence then equity method is followed under which if any dividend is received for common stock it is adjusted from value of common stock.

Here common stock holding = 40% with significant influence.

Therefore dividend share = $200,000 X 40% = $80,000

This value of dividend will be deducted from the carrying value of investment.

Further any shares of preferred stock is not treated in the same way, and dividend is not deducted from cost of shares or carrying value of the same, it is shown as part of income statement.

Dividend to form part of income statement = $100,000 X 75% = $75,000