Rocky Company Acquired 40% of the Voting Stock of Boulder

question 75

Multiple Choice

Rocky Company acquired 40% of the voting stock of Boulder Company for $40 million.At the end of Year 1,Boulder Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Rocky Company's investment in Boulder Company is $44 million.What accounts on Rocky Company's books would be affected by the dividends of Boulder Company?

• A)none
• B)Cash increase $2 million and Stockholders' Equity increases $2 million
• C)Cash increase $5 million and Stockholders' Equity increases $5 million
• D)Cash increase $2 million and Investments decrease $2 million

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Definitions:

Debt-paying Ability

A measure of a company's financial strength, indicating its capability to meet both short-term and long-term liabilities.

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term liquidity and health of the company.