Assume Dexter Corporation owns 1,000 shares (10%) of the 10,000 outstanding shares of Brown. Now assume...

Assume Dexter Corporation owns 1,000 shares (10%) of the 10,000 outstanding shares of Brown. Now assume Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2021.

What amount should Dexter show in the investment account at December 31, 2021 if the beginning of the year balance in the account was $960,000?

		$1,176,000
		$960,000
		$1,104,000
		$1,440,000

Expert Solution

Number of shares of Brown corporation held with Dexter corporation = 1000 shares

These 1000 shares are equal to 10% of the total outstanding shares of Brown corporation,it shows that the Dexter corporation has 10% right to recieve the dividend issued by the Brown corporation

Dividend received on shares held by Dexter corporation will be treated as income but not to br treated as capital appreciation to the invested value. Receiving of dividend does not increase any value of investment.

If the value of the shares get increased by increase in market value of share then it will be treated as capital appreciation and then that amount of capital appreciation make difference in investment value.

In the given case the shares held by Dexter corporation has got cash dividend but not had any capital appreciation, so the investment value of that shares are same as the value in the beginning of the year.

Hence, the amount should Dexter show in the investment account at December 31, 2021 is $960,000.

The answer is $960,000

These are all the information required to solve the above given question.

If there is any clarifications required regarding the above provided answer, please mention them in comment box.

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Thank you.

ekkarill92 answered 1 year ago

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