Question

Use the following information on a company's investments in equity securities with no significant influence. The company's accounting year ends December 31. Investment Date of Acquisition Cost Fair Value 12/31/19 Date Sold Selling Price Colt Company stock 9/20/19 $38,000 $37,000 2/10/20 $42,000 Dana Company stock 10/2/19 14,000 14,200 1/17/20 13,000 What amount is reported for gain or loss on these securities in 2020 income? A. $3,800 gain B. $4,000 gain C. No gain or loss D. $3,000 gain

Answer 1

Answer:

The answer is A. $3,800 gain.

Explanation:

As there is no significant influence achieved in the investee, the company should use Fair value method to record these two investment.

For investment in Colt, its beginning balance for the year 2020 should be equal to its fair value in 31 Dec 19 or $37,000. As it is sold in 10 Feb 20, the Gain realized in 2020 is Selling price - 37,000 or 42,000 - 37,000 = $5,000.

For investment in Dana, its beginning balance for the year 2020 should be equal to its fair value in 31 Dec 19 or $14,200. As it is sold in 17 Jan 20, the Gain realized in 2020 is Selling price - 37,000 or 13,000 - 14,200 = $(1,200).

So, total Gain reported in 2020 for these investments = 5,000 - 1,200 = $3,800 gain.