Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2017. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2017, Click-It paid a $1 million cash dividend declared earlier in 2017, and reported net income for the year ended 2017 of $10 million. On December 31, 2017, 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 a company receives a dividend from an investee, it is recorded as a reduction in the investment account and an increase in cash. Therefore, the dividend payment would increase cash and decrease the investment account on Photo Finish's financial statements.

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