Question

GHQ, Inc. purchased 10,000 shares of common stock of PAS Corp for $25.00 per share on July 1, 2019. PAS Corp has 1,000,000 shares issued and outstanding. PAS Corp paid a dividend of $1.00 per share on December 1, 2019. PAS Corp reporting net income for 2019 of $3,000,000. The value of PAS Corp common stock was $29.00 per share on December 31, 2019. How much income before taxes will GHQ, Inc. report for its investment in PAS Corp in 2019?

Answer 1

Answer:

$10,000

Explanation:

since GHQ purchased 10,000 shares of PAS Corp, they purchased 1% of total stocks outstanding.

the journal entries should be:

July 1, 2019, 10,000 shares purchased

Dr Investment in PAS Corp 250,000

    Cr Cash 250,000

December 1, 2019 dividends distributed

Dr Cash 10,000

    Revenue from investment in PAS Corp 10,000

December 31,2019 adjustment on FMV of PAS Corp.'s stocks

Dr Investment in PAS Corp 40,000

    Cr Unrealized gain - other comprehensive income 40,000

Only dividends received will be considered income for tax purposes, since unrealized gains (or losses) are not taxed until they are realized.