Question

On January 1, 2009, Halley Company acquired 15 percent of the outstanding common stock of Ghosh...

On January 1, 2009, Halley Company acquired 15 percent of the outstanding common stock of Ghosh Corporation for $650,000. Halley appropriately uses the cost method to account for its investment in Ghosh. Ghosh reported net income and paid dividends for the years ended 2009, 2010, and 2011, as follows:

Year

Net Income

Dividends

2009

$100,000

$70,000

2010

$70,000

$70,000

2011

$30,000

$70,000

Based on the above information the amount of income related to its investment in Ghosh to be reported by Halley for the year 2010 is:

1.

$0
2.

$10,500
3.

$70,000
4.

$100,000
5.

None of the above
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Answer #1

Correct answer----1. $0

.

Halley will not show any income of Ghosh in its financial statement related to income earned by Ghosh.

Since Helley use cost method to report investment it can be said that halley has no influence over Ghosh and hence halley will record Dividend received as dividend income and will show its investment at cost.

Halley would have shown a portion of income of Ghosh in het financial statement if she has significant influence over Ghosh and she would have use Equity method of recording investment.

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