On January 4, 2002, Wynn, Inc., bought 15% of Parr Corporation’s common stock for $60,000. Wynn appropriately accounts for this investment by the cost method. The following data concerning Parr are available for the years ended December 31, 2002 and 2003:
2002 2003
Net income $30,000 $90,000
Dividend paid None 80,000
In its income statement for the year ended December 31, 2003, how much should Wynn report as income from this investment?
a. $4,500
b. $9,000
c. $12,000
d. $13,500
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To determine how much Wynn should report as income from this investment in its income statement for the year ended December 31, 2003, we need to consider the cost method of accounting for investments.
Under the cost method, the investor records the initial investment as its cost and increases or decreases it based on its proportional share of the investee's income or losses and any dividends received. In this case, Wynn bought 15% of Parr Corporation's common stock for $60,000.
We need the following information to calculate the income from the investment for Wynn in 2003:
- Proportional share of Parr Corporation's net income in 2003
- Dividends received from Parr Corporation in 2003
To calculate the proportional share of net income, we multiply Parr Corporation's net income by Wynn's ownership percentage. In this case, Wynn owns 15% of Parr Corporation's common stock.
For 2003:
Proportional share of net income = $90,000 * 0.15 = $13,500
Next, we need to consider the dividends received. In 2003, Parr Corporation paid out dividends amounting to $80,000. However, since Wynn owns only 15% of Parr Corporation's common stock, it will receive 15% of the dividends.
Dividends received by Wynn in 2003 = $80,000 * 0.15 = $12,000
To calculate the income from the investment, we subtract the dividends received from the proportional share of net income:
Income from investment in 2003 = Proportional share of net income - Dividends received
Income from investment in 2003 = $13,500 - $12,000 = $1,500
Therefore, Wynn should report $1,500 as income from this investment in its income statement for the year ended December 31, 2003. However, none of the answer choices provided match this amount. It may be an error or omission in the options provided.