CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Fairway Corporation owns 35% of the common stock of Tee Company. At the beginning of 2011, the balance of Fairway's "Investment in Tee" account was $100,000. During 2011, Tee Corp. earned $120,000 in net income and declared and paid $60,000 in total cash dividends. The market value of the Tee Company shares increased from $125,000 to $140,000 during the year.

How much income will Fairway Corporation record in 2011 related to its Investment in Tee Company?
A. $21,000
B. $42,000
C. $57,000
Explanation: Under the equity method of accounting for investments, Fairway records 35% of Tee's income of $120,000, or $42,000, as income from an affiliate.

User Contributed Comments 9

User Comment
stesch Why isnt the proportionate share of dividends used to decrease the investment account?
NufaNka Because dividends reduce the investment account. It have nothing to do with income.
danlan2 Dividend affect the investment account, but not the income. As in an income statement, dividend paid does not affect net income, but it affects retaining earnings.
HenryQ Good question.
broadex Dividends received are recorded as: Debit Cash Cr Investment account(balance sheet)
broadex However if this was consolidation the dividends income would be recorded as follows in the acquiring firm: Debit cash Credit Income
jpducros no Broadex, dividends are eliminated within the same group of companies. No impact in Cash nor Income.
Profache Investment account go up by 21,000 (120,000 - 60,000)x35% and Cash will go up by 21,000 due to 355 of dividends received.
Total Income = 21,000 + 21,000 = 42,000
pveace In subsequent periods, the proportionate share of the investee's earnings increases the investment account on the investor's balance sheet and is recognized in the investor's income statement. Dividends received from the investee are treated as a return of capital and thus, reduce the investment account. Unlike investments in financial assets, dividends received from the investee are not recognized in the investor's income statement." Well its a good question to actually comprehense the material.
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