Question

Accounting for Available-for-Sale and Trading Securities

Assume that Wasley Company purchases 6,000 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

Answer 1

a. Available-for-sale investment:

Dividend income

6600

Capital gain/(loss)

0

Increase in the stock market price will not be recognized as income until the stock is sold.

Total

6600

Unrealized gains (losses) are reported as Accumulated Other Comprehensive Income in the stockholders' equity section of the balance sheet.

b. Trading investment:

Dividend income

6600

Capital gain/(loss)

6000

Total

12600

Both appear on Income Statement.