Joined: 02 Jan 2011
Online Status: Offline Posts: 83
Posted: 14 Sep 2011 at 11:46 | IP Logged
On April 1, 2010, Calico Corp. purchases 10,000 shares of stock in Linwood Corporation for $60 per share, representing 5% of the outstanding shares of Linwood.Calico classifies the investment as an available-for-sale security.During 2010, Linwood pays a dividend of $.30 per share.On December 31, 2010, the Linwood shares are valued at $62 per share.Calico elects to use the fair value option for reporting its investment in Linwood.What is the amount that Calico will record as unrealized gain on the securities in its 2010 income statement?
a. 0
b. 3000
c. 20000
D. 17000
The correct answer is C.
Why the correct answer is not a. 0 ? unrealized gain on the securities are reported as other Compr. Income, and not on Income statement.
$0 since he is using fair value option, there's no
unrealized gain/loss when you book them to fair market
value, which means he will recognize gain/loss on IS
($20000) instead of OCI.
I guess cost method/equity method is irrelevant because
market value can be recognized easily and he has less than
20% ownership. Under cost method he will only recognize
dividend income.
Joined: 02 Jan 2011
Online Status: Offline Posts: 83
Posted: 21 Sep 2011 at 23:53 | IP Logged
It took me a while to understand this subject. But the answer is $20000. The trick here is that Calico elected to use the FV method, it means that the unrealized gain for AFS will go on IS rather that on OCI.
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Topic: AFS (IS or OCI)
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