Intercompany investments

I erred in this problem though the correct answer stumps me: On December 31, 2006 Company P invests $5,000 in Company S in exchange for 25% of the company. During 2007 Company S earns $2,000 and pays a dividend of $500. If Company P uses the cost method of accounting, what values will be reported on the balance sheet and income statement? How much cash will be recognized from the investment? Balance Sheet Income Statement Cash A) $5,375 $500 $125 B) $5,000 $0 $0 C) $5,000 $125 $125 Your answer: B was incorrect. The correct answer was C) $5,000 $125 $125 The carrying value on the balance sheet = $5,000 or the original investment. The income and cash recognized are equal to the dividend of $125.

It only owns 25% of the company so 0.25*500 =125

If using the equity method, then you would count their earnings. But with a passive minority investment, you take your share of dividends.

Yes, there are basically 3 methods: 1) Cost or Market 2) Equity 3) Consolidated also (proportate consolidation but not used anymore only used in international standards but is being phased out). This problem as you to calculate w/w Cost or Market, book value is held at well either the cost you bought it at or the market value of the investment. You will only record dividends and interests payments from the sub in your net income. You should learn theseā€¦ very testable and easy to remember. Much easier then pension, and investment in foreign sub w/currency, and accounting quality/issues.