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. What effect will the dividend have on the Photo Finish financial statements?
A) It would increase cash and increase equity in affiliate earnings.
B) It would increase cash and decrease the investment account.
C)It would increase cash and increase net unrealized gains/losses.
D)It would increase cash and increase the investment account.

Question

Quizplus · Accepted Answer

When Click-It pays out a dividend, this reduces the value of Photo Finish's investment in the stock, which is recorded in the investment account. Additionally, the cash received from the dividend will increase Photo Finish's cash balance. Therefore, the correct choice is B, as it accurately reflects the expected impact of the dividend on Photo Finish's financial statements.

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