Rocky Company Acquired 40% of the Voting Stock of Boulder

question 77

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 will be affected on Rocky Company's books to account for the increase in market value of the investment at the end of Year 1?

• A)none
• B)Cash increase $44 million and Stockholders' Equity increase $44 million
• C)Investments increase $44 million and Stockholders' Equity increase $44 million
• D)Investments increase $4 million and Stockholders' Equity increase $4 million

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Definitions:

Annual Net Cash Flows

This term refers to the amount of money that flows in and out of a business over a year after all expenses have been accounted for.

Expected Total Cash Flows

An estimation of all cash inflows and outflows associated with an investment over its expected life, used to gauge its profitability.

Average Rate of Return

A financial ratio indicating the average annual return earned through an investment over its lifetime, expressed as a percentage of the initial investment cost.

Net Income

The total earnings of a company after subtracting all costs and expenses from revenue.