1. Consider the following facts: - At the beginning of the year, Company A paid
ID: 2449132 • Letter: 1
Question
1. Consider the following facts: - At the beginning of the year, Company A paid $900,000 for an investment in the common stock of Company B. - The investment was for 87,500 shares. - The investment represents 35% of Company B's outstanding common stock. - Company B had net income of $300,000 for the year. - Company B paid cash dividends of $100,000 for the year. On Company A's books, the balance in the Investment in Company B account should have a balance of $ ____________.
$900,000
$1,005,000
None of these answers are correct.
$970,000
$935,000
2.
Consider the following facts:
- Company Z has the following two securities in its trading portfolio at the end of the year:
Common Stock A:
Cost = $10,000
Market Value = $12,000
Common Stock B:
Cost = $9,000
Market Value = $5,000
- Company Z sells Stock B for $10,000.
When Company Z records the sale of Stock B, the journal entry will include:
A debit to Stock Investments for $9,000
None of these answers are correct
A credit to Stock Investments of $9,000
A credit to Sales Revenue for $10,000
A debit to Accounts Receivable for $10,000
3. Consider the following facts:
- At the end of its first year of operations, Company B has a trading portfolio consisting of 3 securities as follows:
Airline Corporation:
Cost = $46,400
Market Value = $49,000
Baxter Company:
Cost = $60,000
Market Value = $57,000
Computer Company:
Cost = $80,000
Market Value = $79,000
Company A should recognize an unrealized loss of $ ________ under the fair value method.
$1,400
$3,400
None of these answers are correct
$2,400
$0
Explanation / Answer
(1) CALCULATION OF BALANCE IN ,INVESTMENT IN COMPANY B ACCOUNT,IN BOOKS OF COMPANY A
INVESTMENT IN THE BEGINING OF THE YEAR =$9,00,000
ADD:DIVIDEND RECEIVED( $1,00,000*35%) =$35,000
BALANCE IN INVESTMENT IN COMPANY B ACCOUNT=$9,35,000
(2) WHEN COMPANY Z RECORDS SALE OF STOCK B JOURNAL ENTRY WILL BE:
CASH A/C DR $10,000
TO STOCK B A/C $9,000
TO PROFIT ON SALE OF STOCK B A/C $1,000
(BEING STOCK B SOLD)
HENCE THE ANSWER A CREDIT TO STOCK INVESTMENT A/C OF $9,000 IS CORRECT
(3) COMAPNY A SHOULD RECOGNISE A TRADING LOSS OF $1,400
FOR AIRLINE CORPORATION PROFIT OF $2,600
FOR BAXTER COMPANY LOSS OF $3,000
FOR COMPUTER COMPANY LOSSOF $1,000
NET LOSS=$3,000+$1,000-$2,600=$1,400
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