CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Southern Corp. purchases an investment in Morton Inc. at a purchase price of $1million, representing 30% of the 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. Southern will report investment income of
A. $40,000
B. $12,000
C. $30,000
Explanation: Equity earnings are computed as the reported net income of the investee company multiplied by the percentage of the outstanding common stock owned.

% investee income earned: 30,000 ($100,000 x 0.3).

User Contributed Comments 6

User Comment
dimanyc Not sure why we are not subtracting a proportion of the dividend from this amount. I thought 30-12=18 makes more sense.
tany Hi dymanic, I think it is because of the wording of the question. If they ask for investment income, they want just %income received, if they mention the investment account, then they want %(income-dividend) - i guess..
C2inOC Sounds logical
dblueroom Actually there shouldn't be such distinction, both dividend and proportionate share of NI are both related to investment income. This is a trick.
dblueroom never mind my previous comment. Quote "Under euqity method, dividends are treated as a return of investment (reduce the investment balance), and NOT as Income." Only for passive investment dividends will be recognized as part of income. So it has nothing to with wording, it's the equity method.
LyncKidd Dividends are a return on investment and impact the investment account on the balance sheet.
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