Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time Hudson Company reported its earnings and by how much?
A)There is no entry and no effect.
B)Investments would increase by $15 million and Stockholders' Equity would increase by $15 million.
C)Cash would increase by $15 million and Stockholders' Equity would increase by $15 million.
D)Investments would increase by $6 million and Stockholders' Equity would increase by $6 million.

Question

Quizplus · Accepted Answer

Rock Company would recognize its share of Hudson's net income, which is 40% of $15 million = $6 million. This increases the Investments account and Stockholders' Equity by $6 million.

Rock Company Acquired 40% of the Voting Stock of Hudson