Gaw Company Owns 15% of the Common Stock of Trace

question 3

Multiple Choice

Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?

• A) $16,500.
• B) $9,000.
• C) $25,500.
• D) $7,500.
• E) $50,000.

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Definitions:

Funding

Financial support or resources provided to businesses, organizations, or individuals for a specific purpose, such as operations, projects, or investments.

Cost of Debt Capital

The effective rate that a company pays on its current debt, which can be measured as the after-tax rate of return to lenders or creditors.

Creditors Demand

The situation in which creditors request or require payment of money owed to them by the company.

New Borrowings

Funds that a company or government secures by entering into a new loan agreement.