Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2015. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2015, Click It paid a $1 million cash dividend declared earlier in 2015 and reported net income for the year ended 2015 of $10 million. On December 31, 2015, 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, 2015 balance sheet?
A) $20,000,000.
B) $23,000,000.
C)$23,600,000.
D)$24,000,000.

Question

Quizplus · Accepted Answer

The initial investment of $20 million represents 40% of the total value of Click-It's 2 million $1 par value shares at $10 per share. This means that Click-It's total value is $50 million ($1 par value x 2 million shares/$20 per share = $50 million). 
Since Photo Finish owns 40% of Click-It, its share of Click-It's total value is $20 million ($50 million x 40% = $20 million). 
After Click-It's net income of $10 million and dividend payment of $1 million, its total value at December 31, 2015 is $59 million (($50 million + $10 million net income) - $1 million dividend = $59 million). 
So Photo Finish's 40% share of Click-It's total value is $23.6 million ($59 million x 40% = $23.6 million). This is the amount that will be reported on Photo Finish's December 31, 2015 balance sheet.

Photo Finish Corporation Bought a 40% Interest in Click-It Corporation's