Question

On 1/1/2008 Aero Company purchased 10% of Bert Company’s common stock for $80,000, which was equal to 10% of the book value of Bert on 1/1/2008. Aero appropriately used the cost method of accounting for its investment.  Aero purchased an additional 25% of Bert's common stock on 1/1/2010 for $190,000 which was also equal to its share of book value at that date.  Aero can now exercise significant influence over the operating and financial policies of Bert.  The total net income and dividends of Bert are as follows:

Year	Net Income	Dividends
2008	$50,000	$20,000
2009	$75,000	$30,000
2010	$100,000	$50,000

Based on the information given above, the amount of income that Aero would report on its income statement related to its investment in Bert for 2010 is:

	a.	$17,500
	b.	$35,000
	c.	$34,000
	d.	$25,000
	e.	None of the above

Answer 1

Answer e) None of the above

Aero will not show any income of Bert in its financial statement related to income earned by Bert.

Since Aero use cost method to report investment it can be said that Aero has no influence over bert and hence Aero will record Dividend received as dividend income and will show its investment at cost.

Aero would have shown a portion of income of Bert in his financial statement if they have significant influence over Bert and they would have use Equity method of recording investment.