Calculating Investment Revenue Based on Equity Ownership: A Case Study

Cullumber Company owns 24,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,220,000 and pays cash dividends of $975,000. Let's determine how this impacts Cullumber's investment revenue.

Calculating Investment Revenue

To calculate the investment revenue for Cullumber Company in 2018, we need to determine the portion of Taylor, Inc.'s earnings that Cullumber is entitled to as a shareholder. This is done by calculating the ownership percentage:

Ownership percentage = Shares owned / Total shares outstanding

Ownership percentage = 24,000 / 50,000 = 0.48 or 48%

Cullumber owns 48% of Taylor, Inc. To calculate the investment revenue, we multiply this ownership percentage by Taylor, Inc.'s earnings:

Investment revenue = Ownership percentage * Taylor, Inc.'s earnings

Investment revenue = 0.48 * $1,220,000 = $585,600

Therefore, Cullumber should report investment revenue for 2018 of $585,600.

Key Takeaway

Investment revenue is directly tied to the company's ownership percentage and the earnings of the company it has invested in. While dividends are a form of return on investment, they are considered a separate accounting item and do not factor into the calculation of investment revenue.