Asked by Football news With Scott and Lucas on May 26, 2024
Verified
Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31,2019.On that date,Photo Finish paid $20 million for the 2 million shares at a $10 market price per share.On December 31,2019,Click-It paid a $1 million cash dividend declared earlier in 2019,and reported net income for the year ended 2019 of $10 million.On December 31,2019,Click-It's stock was trading at $11.50 per share. At what amount will the Click-It investment be reported on Photo Finish's December 31,2019 balance sheet?
A) $20,000,000.
B) $23,000,000.
C) $23,600,000.
D) $24,000,000.
Equity Method
An accounting technique used when a company invests in another company and exercises significant influence over it, adjusting the value of the investment based on the investee's performance.
Cash Dividend
The disbursement of cash from a company's earnings to its shareholders, a decision made by the board of directors for a specific class of its investors.
Voting Common Stock
A class of stock that grants the shareholder voting rights in a corporation's decisions, typically one vote per share owned.
- Assess the carrying amount of investments with the use of the equity method.
Verified Answer
JI
Jaylon IngramMay 26, 2024
Final Answer :
C
Explanation :
First, we need to calculate the fair value of Photo Finish's investment in Click-It as of December 31, 2019.
Fair value of investment = (2,000,000 shares x $11.50 market price per share) = $23,000,000
Next, we need to calculate Photo Finish's share of Click-It's net income for the year ended December 31, 2019.
Share of net income = 40% x $10,000,000 = $4,000,000
Finally, we need to subtract the cash dividend received from Click-It during the year.
Cash dividend received = 40% x $1,000,000 = $400,000
Therefore, the carrying value of Photo Finish's investment in Click-It as of December 31, 2019 is:
Carrying value = $20,000,000 (initial investment) + $4,000,000 (share of net income) - $400,000 (cash dividend) = $23,600,000
So, the correct answer is C, $23,600,000.
Fair value of investment = (2,000,000 shares x $11.50 market price per share) = $23,000,000
Next, we need to calculate Photo Finish's share of Click-It's net income for the year ended December 31, 2019.
Share of net income = 40% x $10,000,000 = $4,000,000
Finally, we need to subtract the cash dividend received from Click-It during the year.
Cash dividend received = 40% x $1,000,000 = $400,000
Therefore, the carrying value of Photo Finish's investment in Click-It as of December 31, 2019 is:
Carrying value = $20,000,000 (initial investment) + $4,000,000 (share of net income) - $400,000 (cash dividend) = $23,600,000
So, the correct answer is C, $23,600,000.
Learning Objectives
- Assess the carrying amount of investments with the use of the equity method.