Question

On January 2, 2012, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2012 and 2013, were $10,000 and $50,000, respectively. During 2013, Ranger declared and paid a dividend of $60,000. There were no dividends in 2012. On December 31, 2012, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2013 income statement as income from this investment?

Answer 1

Income from the investment on the 2013 income statement for Howdy Doody Corporation is $7,200, representing 12% of the dividends paid by Ranger Corporation.

Step-by-step explanation:

The income that Howdy Doody should show on the 2013 income statement from the investment in Ranger Corporation is solely from the dividends received, because it is an available-for-sale security. The income from dividends for Howdy Doody Corporation is its share of Ranger's dividends declared. Ranger declared and paid dividends of $60,000 in 2013. Since Howdy Doody owns 12% of Ranger, the income from dividends will be 12% of $60,000, which is $7,200. Any unrealized gains or losses in the fair value of the investment are reported in other comprehensive income and not in the income statement.