The balance sheet indicates that Paul Corporation owns 40 percent of the common stock of Sun Company.During Year 2, Sun Company earned $12,000 and paid $4,000 of dividends.Paul Corporation made the following entries on its books during the year.
Investment in Company B ..................... 4,800
Equity in Earnings of Affiliate ..........................4,800
Net income of Paul Corporation includes $4,800 of equity income.It received only $1,600 of cash.
The T-account work sheet for preparing the statement of cash flows
A)adds $3,200 to net income in deriving cash from operations.
B)subtracts $1,600 from net income in deriving cash from operations.
C)adds $1,600 to net income in deriving cash from operations.
D)subtracts $3,200 from net income in deriving cash from operations.
E)adds $3,200 to retained earnings in deriving cash from investing.

Question

The balance sheet indicates that Paul Corporation owns 40 percent of the common stock of Sun Company.During Year 2, Sun Company earned $12,000 and paid $4,000 of dividends.Paul Corporation made the following entries on its books during the year.
 Investment in Company B ..................... 4,800
Equity in Earnings of Affiliate ..........................4,800
Net income of Paul Corporation includes $4,800 of equity income.It received only $1,600 of cash.
The T-account work sheet for preparing the statement of cash flows
A)adds $3,200 to net income in deriving cash from operations.
B)subtracts $1,600 from net income in deriving cash from operations.
C)adds $1,600 to net income in deriving cash from operations.
D)subtracts $3,200 from net income in deriving cash from operations.
E)adds $3,200 to retained earnings in deriving cash from investing.

Quizplus · Accepted Answer

The $4,800 equity income is non-cash, so it is subtracted from net income. Paul received $1,600 in cash dividends, so the non-cash portion is $3,200 ($4,800 - $1,600).

The Balance Sheet Indicates That Paul Corporation Owns 40 Percent