Practice Quiz

CLEP Accounting

Category - Accounting

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A corporation purchased 20% of the outstanding shares of common stock of Ken’s Canaries as an investment. Ken’s Canaries had a banner year with profits and paid cash dividends. What would the corporation that holds the stock do to record the transaction?
  1. Debit Cash; credit Dividend Revenue
  2. Debit Investment, Ken’s Canaries; credit cash
  3. Debit Cash; credit Unearned Income
  4. Debit Investment, Ken’s Canaries; credit Income, Ken’s Canaries
  5. Debit Cash; Credit Investment, Ken’s Canaries
Explanation
Answer - E - The corporation holding the stock would debit their Cash account and credit the Investment, Ken’s Canaries account.

Key Takeaway: An investor’s share of a corporation’s net income or net loss is recorded as a revenue or a loss for the period. In this case, the cash dividend increased the Cash account with a debit, and decreased the investment account with a credit.
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