Parent Co. invested $1,000,000 in Sub Co. for
25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends
each year.
Instructions
Use the information in the following T-account
for the investment in Sub to answer the following questions.
Investment
in Sub Co.
|
1,000,000
|
|
|
110,000
|
|
|
|
44,000
|
.:.
(a) How much was Parent Co.’s share of Sub
Co.’s net income for the year?
(b) How much was Parent Co.’s share of Sub
Co.’s dividends for the year?
(c) What was Sub Co.’s total net income for
the year?
(d) What was Sub Co.’s total dividends for
the year?
(a) $110,000, the increase to the Investment
account.
(b) If the
dividend payout ratio is 40%, then 40% of the net income is their share of
dividends = $44,000.
(c) Their share
is 25%, so, Total Net Income X 25% = $110,000
Total Net
Income = $110,000 ÷ 25% = $440,000
(d) $44,000 ÷
25% = $176,000 or $440,000 X 40% = $176,000
