. In Year One, Waterloo Corporation makes an investment in the equity securities

Question

. In Year One, Waterloo Corporation makes an investment in the equity securities of another company for $53,000. The company then collects a cash dividend of $2,000. At the end of Year One, this investment is valued at $58,000. In March of Year Two, the entire investment is sold for cash of $54,000. Waterloo reported this investment as being in available-for-sale securities. How would Waterloo’s reported net income have been different in each of these two years if the investment had been reported as a trading security?

Explanation / Answer

If the Investment were kept as available for sale Year 1 Year 2 Year end Fair value /Sales Price        58,000        54,000 Less: Cost price/ Fair Value of investment        53,000        58,000 Income/(Loss)           5,000         -4,000 Add: Dividend income           2,000 Total income will be reported           7,000         -4,000 If Investment is kept for trade Year 1 Year 2 Sales Price        54,000 Less: Cost price of investment        53,000 Income/(Loss)                  -             1,000 Add: Dividend income           2,000 Total income will be reported           2,000           1,000

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