Cullumber Corporation earns $840000 and pays cash dividends of $300000 during 2021. Dexter Corporation owns 4200 of the 10000 outstanding shares of Cullumber. What amount should Dexter show in the investment account at December 31, 2021 if the beginning of the year balance in the account was $1080000?

Answer: $1,306,800

Explanation:

In answering this question, we look at how much of that income, Cullumber still had on hand and then take the proportion that belongs to Dexter.

Cullumber Corporation earns $840,000 and pays cash dividends of $300,000 during 2021.

That means that after paying the dividends they are left with,

= 840,000 - 300,000

= $540,000

Now, Dexter owns 4200 out of 10,000 shares. That means they own,

= 4,200/10,000

= 42% of Cullumber Corporation stock.

If they own 42% of the stock, they are entitled to 42% of the income so,

= 42% * 540,000

= $226,800

Now we then add this figure to the opening balance,

= $1,080,000 + $226,800

= $1,306,800

$1,306,800 is the amount Dexter should show in the investment account at December 31, 2021.