Question

Picayune company purchased 40,000 of Stewart Company's 100,000 shares for $400,000 on 1/1/X1 when Stewart's equity consisted of $500,000 capital stock and $500,000 of retained earnings. An appraisal of Stewart's assets failed to identify any mis-valued assets. Picayune designated the Investment as a fair value investment. During year X1, Stewart earned a $100,000 net income and paid $50,000 of dividends. On 12/31/X1, Stewart's stock traded at $10.20 per share. How much investment income should Picayune recognize in year X1?

Answer 1

a. $8,000

b. $20,000

c. $28,000

d. $40,000

The correct answer is B,$20,000

Step-by-step explanation:

The investment income attributable to entire shareholders of Picayune is the amount of dividends paid,which is $50,000.

Out of which Picayune is entitled to 40% (40,000/100,000) based on the shareholding of Picayune in Stewart Company.

Dividends received by Picayune =40%*$50,000=$20,000

The investment income of Picayune to be recognized in year X1 is $20,000