- CFA Exams
- CFA Level I Exam
- Study Session 5. Financial Reporting and Analysis (1)
- Reading 13. Intercorporate Investments
- Subject 3. Investments in Associates
CFA Practice Question
Southern Corp. purchases an investment in Morton Inc. at a purchase price of $1million, representing 30% of the book value of Morton. During the year, Morton reports net income of $100,000 and pay dividends of $40,000. At the end of the year, the market value of Southern's investment is $1.2 million. The investment will be reported on Southern's balance sheet at:
A. $1 million.
B. $1.018 million.
C. $1.060 million.
Explanation: The year-end balance of the investment account is computed as follows:
% investee income earned: 30,000 ($100,000 * .3).
Dividends received: (12,000) ($40,000 * .3)
Ending balance: $1,018,000.
Beginning balance: $1,000,000.
% investee income earned: 30,000 ($100,000 * .3).
Dividends received: (12,000) ($40,000 * .3)
Ending balance: $1,018,000.
User Contributed Comments 4
| User | Comment |
|---|---|
| zwer | What is 12,000? |
| Ree2 | 40 000*0.3 = 12 000 100 000 * 0.3 = 30 000 30 000 - 12 000 = 18 000 Hope this helps |
| dblueroom | 12,000 is investor's share of dividends paid during the year, which reduces the investment account. |
| aruffo | So the market price is a red herring? |