Question

(Equity Method) Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out

40% of net income in dividends each year.

Instructions

Use the information in the following T-account for the investment in Sub to answer the following questions.

Investment in Sub Co.

1,000,000

110,000

44,000

(a) How much was Parent Co.’s share of Sub Co.’s net income for the year?

(b) What was Sub Co.’s total net income for the year?

(c) What were Sub Co.’s total dividends for the year?

(d) How much was Parent Co.’s share of Sub Co.’s dividends for the year?

Short answer

Parent co.’s share in net income is $110,000 and total net income of Sub Co is $440,00. Total dividend of Sub Co. is 176,000. Parent Co.’s share in the dividend is $44,000

Step-by-step solution

Parent Co’s net income

After looking into the T-account of Parent Co.’s it is found that the investment account of Parent Co.’s is increased by $110,000, which means Parent Co.’s share in the net income is $110,000.

Calculation of total net income  

The net income of the Sub Co.’s can be calculated by using the Parent Co.’s share in the net income.

$\begin{array}{c}\text{Total\hspace{0.17em}Net\hspace{0.17em}Income=\hspace{0.17em}}\frac{\text{Parent\hspace{0.17em}Co.'s\hspace{0.17em}share\hspace{0.17em}of\hspace{0.17em}net\hspace{0.17em}income}}{\text{Percentage\hspace{0.17em}shares\hspace{0.17em}in\hspace{0.17em}Sub\hspace{0.17em}Co.}}\\ =\frac{\$110,000}{25\%}\\ =\$440,000\end{array}$

Hence, Sub Co.’s total net income is $440,000

Parent Co. share in the dividend

As the dividend rate is 40% of net income Parent Co. Share in the dividend is, $44,000

Total dividend paid be Sub Co.

Net dividend paid by the Sub Co’s is,

$\begin{array}{c}\text{Total\hspace{0.17em}Dividend=\hspace{0.17em}\hspace{0.17em}}\frac{\text{Dividend\hspace{0.17em}\hspace{0.17em}paid\hspace{0.17em}\hspace{0.17em}to\hspace{0.17em}\hspace{0.17em}Parent\hspace{0.17em}Co.}}{\text{Equity\hspace{0.17em}percentage\hspace{0.17em}\hspace{0.17em}of\hspace{0.17em}Parent\hspace{0.17em}Co.}}\\ =\frac{\$44000}{25\%}\\ =\$176,000\end{array}$

Hence, the total dividend paid is $176,000