Question

NOP has the following portfolio of investments at December 31, 2019: 400 shares of Houston Corp...

  1. NOP has the following portfolio of investments at December 31, 2019:

    • 400 shares of Houston Corp with cost of $11,000 and FMV of $12,000
    • 300 Shares of Dallas Corp with cost of $8,000 and FMV of $7,250

    During 2020, the following transactions occurred:

    • March 15, bought 100 shares of Austin Corp for $45 per share.
    • July 31, sold all Dallas Corp stock for $7,400.
    • October 1, received a $0.50 per share cash dividend on Houston Corp.

    On December 31, 2020, the fair market value of each of the investments was:

    • Houston Corp, FMV $11,700
    • Austin Corp, FMV $3,900

    What would be the total impact on net income and stockholder’s equity in 2020, assuming the above investments were accounted for using the fair market value method? (decreases are shown in parentheses)

    NI: 50
    SHE: 50

    NI: (550)
    SHE: (550)

    None of the other answer choices is correct.

    NI: (400)
    SHE: (550)

    NI: (300)
    SHE: (300)

    NI: (400)
    SHE: (400)

    NI: 200
    SHE: 200
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Answer #1

Answer is NI: (550) ; SHE: (550)

Explanation:

Cost FMV on 12/31/19 FMV on 12/31/20 UG or UL
Houston Corporation $11,000 $12,000 $11,700 -$300
Austin Corporation (100 shares at $45 per share) $4,500 $3,900 -$600
Gain on sale of Dallas Shares ($7400-7250) $150
Dividends recevied from Houston ($0.50*400 shares) $200
Net effect on net income (-300-600+150+200) -$550
Net effect on stockholders equity -$550
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