Accounting for Available-for-Sale and Trading Securities
Assume that Wasley Company purchases 8,000 common shares of
Pincus Company for $12 cash per share. During the year, Wasley
receives a cash dividend of $1.10 per common share from Pincus, and
the year-end market price of Pincus common stock is $13 per share.
How much income does Wasley report relating to this investment for
the year if it accounts for the investment as:
a. Available-for-sale investment?
Dividend income | $Answer |
Capital gain/(loss) | $Answer |
Total | $Answer |
b. Trading investment?
Dividend income | $Answer |
Capital gain/(loss) | $Answer |
Total | $Answer |
Solution a:
Under available for sale investment, dividend income will be reported as income for the year and the increase in the market price of the stock will be recognized as income when the investment is sold out.
Therefore, dividend income =8000*1.10 = $8,800 and capital gain (Loss) = $0. Total = $8,800.
Solution b:
Under trading investment, dividend and increase in market both are recorded as income for the year. Therefore,
Dividend income = $8,800
Unrealized capital gain = ($13- $12) * 8000 = $8,000
Total = 8800 + 8000 = $16,800
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