Question

On January 1, 2008, Capitech Corporation acquired Logirun, Inc. as a long-term investment for $250,000 (a 30 percent common stock interest in Logirun). During 2008, Logirun reported net income of $90,000 and declared and paid cash dividends of $20,000. What is the amount of income that Capitech should report from this investment for 2008?

Answer 1

Capitech should report $21,000 of income from its investment in Logirun for 2008, which is its share of Logirun's net income after accounting for dividends received.

Step-by-step explanation:

Capitech's income from its investment in Logirun for 2008 is determined by its 30% ownership stake in Logirun's net income and dividends. With Logirun's net income at $90,000, Capitech accounts for its share by taking 30%, resulting in $27,000 ($90,000 × 0.30). However, as Capitech is entitled to only 30% of the dividends, which amount to $6,000, it subtracts this portion from the income attributed from net income. The final calculation yields Capitech's reported income from the investment for 2008 at $21,000 ($27,000 - $6,000). This methodology aligns with the proportional ownership principle, reflecting the economic benefits and responsibilities associated with Capitech's ownership percentage in Logirun. It offers a clear and concise approach to determining the financial impact of the investment on Capitech's reported income for the specified fiscal year.