Question

Rome Company owns 40% interest in the stock of GHF Corporation. During the year, GHF pays $40,000 in dividends to Rome, and reports $300,000 in net income. Rome Company's investment in GHF will increase Rome net income by

Answer 1

Rome Company's investment in GHF will increase Rome's net income by $120,000. This amount reflects their 40% share of GHF's reported net income for the year and is independent of any dividends received, which are accounted for separately.

Step-by-step explanation:

Calculating the Impact of Dividend and Share of Net Income on Rome Company's Net Income

Rome Company owns a 40% interest in GHF Corporation. Given this level of ownership, Rome Company exercises significant influence over GHF and, according to the equity method of accounting, must report a proportionate share of GHF's net income as well as any dividends received as an increase or decrease in their investment value. If GHF Corporation reports $300,000 in net income, Rome's share is 40% of this amount, which equals $120,000. This figure will increase Rome Company's net income. However, the $40,000 in dividends paid to Rome must be subtracted from the investment account and does not directly affect Rome's net income.

Therefore, Rome Company's investment in GHF will increase Rome's net income by $120,000, which is their share of GHF's net income, irrespective of the dividend payment.