On January 1, year 1, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc. On January 2, year 2, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additional 20% of Penny’s outstanding stock. The two purchases were made at prices proportionate to the value assigned to Penny’s net assets, which equaled their carrying amounts. Mega does not elect the fair value option to report its investment in Penny. For the years ended December 31, year 1 and year 2, Penny reported the following: | Year 1 | Year 2 | | Dividends paid | $200,000 | $300,000 | | Net income | 600,000 | 650,000 |
In year 2, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to year 1 investment income?
| Year 2 investment income | Adjustment to year 1investment income | | A. | $195,000 | $160,000 | | B. | $195,000 | $100,000 | | C. | $195,000 | $ 40,000 | | D. | $105,000 | $ 40,000 |
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