Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2017. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2017, Click-It paid a $1 million cash dividend declared earlier in 2017, and reported net income for the year ended 2017 of $10 million. On December 31, 2017, 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, 2017 balance sheet?
A)$20,000,000.
B)$23,000,000.
C)$23,600,000.
D)$24,000,000.

Question

Quizplus · Accepted Answer

To determine the amount at which the Click-It investment will be reported on Photo Finish's December 31, 2017 balance sheet, we need to calculate Photo Finish's share of Click-It's net income and dividends for the year.

40% of Click-It's net income of $10 million is $4 million.
40% of Click-It's dividend payment of $1 million is $0.4 million.

The carrying amount of the investment at the end of the year is:

Initial cost of investment: $20 million
Add Photo Finish's share of net income: $4 million
Subtract Photo Finish's share of dividend payment: ($0.4 million)
Total carrying amount: $23.6 million

Option C is therefore the correct answer.

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