Asked by Zachary Whetstone on May 03, 2024
Verified
GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR's investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX?
A) An increase of $23,000
B) An increase of $1,000
C) No effect
D) A decrease of $1,000
Cost Method
An accounting method used to value an investment, based on the cost to acquire it plus any additional investments or deducting any reductions.
- Digest the technicalities of employing the Equity Method for the purpose of accounting investments.
- Calculate consolidated retained earnings and recognize the impact of dividends.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
C
Explanation :
Under the cost method, the investment in NMX is initially recorded at cost, which is equal to the amount paid to acquire the investment (in this case, 80% of the cost). Any dividends received from NMX would be recorded as a reduction in the investment balance. Therefore, GNR’s investment in NMX account would be reduced by $7,200 (80% x $9,000), resulting in no effect on the investment balance.
Learning Objectives
- Digest the technicalities of employing the Equity Method for the purpose of accounting investments.
- Calculate consolidated retained earnings and recognize the impact of dividends.