Question

Kelly’s, Inc. purchased 60,000 shares of Flip’s, Inc., a NON PUBLIC entity, on March 17, 2019...

Kelly’s, Inc. purchased 60,000 shares of Flip’s, Inc., a NON PUBLIC entity, on March 17, 2019 for $2 per share. This represented 10% of Flip’s stock and Kelly received no special rights.

At March 30, 2019 a new investor invested in Flip at a stock price of $5 per share.

At April 31, 2019 another new investor invested in Flip at a stock price of $6 per share.

On May 31, 2019, the estimated value of the stock fell to $3 per share due to adverse news coverage. This decline in value was deemed to be due to a temporary event and a retraction was printed in June

In June 2019, the stock of Flip was sold by Kelly’s for $8 per share

The gain or loss recorded for this stock in Kelly’s income statement for the months of May and June should be as follows:

May

June

A.

No gain or loss

$120,000 gain

B.

$180,000 loss

$300,000 gain

C.

No gain or loss

$360,000 gain

D.

None of the above combinations are correct, but adequate information is provided to compute gains or losses.

E.

Not enough information to tell.
Business   Accounting   
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Answer #1

Option B - Explained Below

Investment in equity are always measured at fair value. Investments are restated to fair value at the end of every month.

As on April 31, 2019, Value of Investment is $6 per share.

Gain / Loss as on May 31, 2019:

Value of Share as on May 31, 2019 - $3 per share.

Value of Share as on Apr 31, 2019 - $6 per share.

Loss per Share = $3 per share.

Total Loss for May 31, 2019 = 60,000 * $3 = $ 1,80,000.

Gain / Loss as on June 30, 2019:

Value of Share as on Jun 30, 2019 - $8 per share.

Value of Share as on May 31, 2019 - $3 per share.

Gain per Share = $5 per share.

Total Loss for May 31, 2019 = 60,000 * $5 = $ 3,00,000.

So, the answer is Option B

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