Question

On January 2, 2018, All Good Company purchased 5,000 shares of the stock of Big Bad Company, and DID NOT obtain significant influence. The investment is intended as a long-term investment. The stock was purchased for $10 per share, and represents a 10% ownership stake. Big Bad Company made $250,000 of net income in 2018, and paid dividends to All Good Company of $12,500 on December 15, 2017. On December 31, 2017, Big Bad Company's stock was trading on the open market for $12.50 per share at the end of the year. Use this information to determine the unrealized gain or loss on the investment that should be reported at year end by All Good Company. If it is a loss, enter as a negative number. Round to nearest whole dollar.

Answer 1

Answer:

This investment will be treated as Available for Sales Investment.

Purchase price of shares purchased on Jan 2, 2018 = $10 per share

As on December 31, 2018 share was trading on the open market for $12.50 per share

As such at year end, since the share value has increased, unrealized gain will be reported in Other Comprehensive income (OCI).

Unrealized gain = 5,000 * ($12.50 - $10) = $12,500

Unrealized gain that will be reported in OCI at year end = $12,500