Question

Rochester Corp. holds a 15% equity investment in LaCrosse Inc. Reedsburg Investments holds 45% of LaCrosse’s stock. On October 1, 2017, LaCrosse declares and pays dividends to its stockholders. How will the dividend affect each company’s net income for the year? Listed First Rochester Listed Second Reedsburg

Answer 1

Answer:

Rochester Corp

Increase

Reedsburg Investments

No effect

Explanation:

Rochester Corp will Increase and Reedsburg Investments will show No effect

Therefore Rochester Corp. should go ahead and use the fair-value method in order to account for its own investment in LaCrosse.

This means the dividend would increase the net income while the Payment of dividends would tend to Increase the investment account on Reedsburg’s balance sheet, but will have or shown no effect on its income statement.