Edmonton Ltd.owns 10% interest in the shares of Jasper Corporation.During the year, Jasper pays $5,000 in dividends to Edmonton and reports a net loss of $50,000.Edmonton's investment in Jasper will affect Edmonton's profit by
A)$500 increase.
B)$5,000 increase.
C)$5,000 decrease.
D)$4,500 decrease.

Question

Quizplus · Accepted Answer

Since Edmonton Ltd. owns less than 20% of Jasper Corporation, it is likely using the cost method for accounting. Under this method, dividends received are recognized as income. Therefore, the $5,000 in dividends received will increase Edmonton's profit by $5,000. The net loss of Jasper does not affect Edmonton's profit under the cost method.