Question

During Year 1, its first year of operations, Galileo Company purchased two available-for-sale investments as follows:

Security	Shares Purchased	Cost
Hawking Inc.	730		$31,390
Pavlov Co.	1,980		44,352

Assume that as of December 31, Year 1, the Hawking Inc. stock had a market value of $51 per share and the Pavlov Co. stock had a market value of $40 per share. Galileo Company had net income of $243,100 and paid no dividends for the year ending December 31, Year 1. All of the available-for-sale investments are classified as current assets.

a. Prepare the Current Assets section of the balance sheet presentation for the available-for-sale investments.

Galileo Company
Balance Sheet (selected items)
December 31, Year 1
Assets
Current Assets:
Available-for-Sale Investments, at Cost	$ ?	?
Less Valuation Allowance for Available-for-Sale Investments	?	? $

b. Prepare the Stockholders' Equity section of the balance sheet to reflect the earnings and unrealized gain (loss) for the available-for-sale investments.

Galileo Company
Balance Sheet (selected Stockholders' Equity items)
December 31, Year 1
Stockholders' Equity
Retained Earnings	$ ?
Unrealized Gain (Loss) on Available-for-Sale Investments	?

Answer 1

Answer :-

Explanation :-

Part A

GALILEO COMPANY Balance Sheet (selected current asset items) December 31
Assets
Current assets:
Trading investments, at cost	75742
Plus: valuation allowance for Trading investments	40688	$116430

Fair value

Hawking Inc.= 51 × 730 = 37230

Pavlov Co. = 40× 1980 = 79200

Total fair value = 116430

Total cost = 31390 + 44352 = 75742

Unrealized gain = 116430 - 75742 = 40688

Part B:-

stock holders equity

Retained earnings	243100
Unrealized gain (loss) on available for sale	40688
Investments

Note:-

The unrealized gain on trading investments is reported on the income statement and added in determining stockholders’ equity. Because is unrealized gain is closed to an income statement, the unrealized gain will increase net income.