Rock Company Acquired 40% of the Voting Stock of Hudson

question 33

Multiple Choice

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time Hudson Company reported its earnings and by how much?

• A)There is no entry and no effect.
• B)Investments would increase by $15 million and Stockholders' Equity would increase by $15 million.
• C)Cash would increase by $15 million and Stockholders' Equity would increase by $15 million.
• D)Investments would increase by $6 million and Stockholders' Equity would increase by $6 million.

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Definitions:

S Corporation

A close business corporation that has most of the attributes of a corporation, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership.

Taxes

Mandatory financial charges or levies imposed by a government on individuals, corporations, or other legal entities to fund public expenditures.

Close Corporation

A private company characterized by a limited number of shareholders, and typically, more informal management and operations.

State Of Incorporation

The jurisdiction under whose laws a corporation is registered and operates, determining its legal obligations and protections.