ABC Corporation does not have a significant influence over its 10% investment in
ID: 2395778 • Letter: A
Question
ABC Corporation does not have a significant influence over its 10% investment in Yazd Corporation. If Yazd completed its first year following the acquisition with $10,000 net income and paid $12,000 dividend, how this information affects ABC’s account of Investment in Yazd Corporation?
Investment in Yazd is increased by $2000.
Investment in Yazd is decreased by $2000
Investment in Yazd is decreased by $200
Investment in Yazd is not affected due to using cost method.
None of these answers is correct.
a.Investment in Yazd is increased by $2000.
b.Investment in Yazd is decreased by $2000
c.Investment in Yazd is decreased by $200
d.Investment in Yazd is not affected due to using cost method.
e.None of these answers is correct.
Explanation / Answer
Answer:
None of these answers is correct.
Since ABC Corp don't have a significant influence over Yazd corporation and it is a long term investment, therefore, the method of accounting used is Cost method.
Here, Investment is recorded at cost and no changes are made. When dividend is received, it is recognized as revenue income.
Thus the correct entry here will be to recognize the dividend received.
Cash A/c Dr
To Dividend Income a/c
e.None of these answers is correct.