Use the information below to answer the following questions:
On 1 January 2012, Sky-High Ltd acquired 100 000 shares (30% of the voting interest) in Down Ltd for $600 000 cash. On 30 June 2012, Down Ltd announced its earnings per share for the first 6 months of 2012 at $1.50 per share. On 20 November, Down Ltd paid dividends to shareholders at $0.90 per share. On 31 December 2012, Down Ltd announced its earnings per share for 2012 at $2.80 per share (i.e., $1.30 additional since 30 June).
-If Sky-High Ltd used the cost basis,which of the following accounting records would it make on 30 June 2012 in response to Down Ltd's earnings announcement?
A) It would increase dividend revenue by $150 000.
B) It would increase investment in Down Ltd by $150 000.
C) It would decrease investment in Down Ltd by $150 000.
D) No record would have been made.

Question

Quizplus · Accepted Answer

Since Sky-High Ltd is using the cost basis, no adjustment is made to the investment in response to the earnings announcement. The investment is only adjusted when dividends are received or when there is a change in the value of the investment. Therefore, no record is made in response to the earnings announcement.

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