Question

On February 5, 2020. Apple Inc. purchased 12% of Pear Inc.'s common stock for $50,000. Pear's not income for the years ended December 31, 2020, and December 31, 2021, were $10.000 and $50,000, respectively. Pear did not pay any dividends in 2020. Pear declared and paid a dividend of S60,000 to all its shareholders in 2021. The fair value of the Pear stock owned by Apple Inc. is valued at $70.000 and $120.000 on December 31, 2020 and December 31, 2021, respectively. How much should Apple Inc. show in the 2021 income statement as income from this investment? 

Answer 1

Here the Investment value is less than 20% so cost method of investment accounting will be applicable which takes the historical costs in accounting, which means the value of investment will not fluctuates based on the fair value but will be tested for any impairment.

Here the fair value are increasing but will not have any impact on net income as cost method recognise the income when the investment is sold in cash, and not merely changes in stocks price.

Further the dividend Received will be the actual net income on the investment which the company should recognise in the year when it is declared.

Here the dividend of $ 60,000 is declared in 2021, and the company is having investment of 12% .

Thus Net income from investment = $ 60,000 × 12% = $ 7,200.

Thus the correct Option is-------------A i.e None of this choices is correct.