Question

Big Co. purchases shares of Little Co starting on 1/1/21. Little Co. has 100,000 shares of stock outstanding. Relevant data shown below:

1/1/21: Purchased 5,000 shares at $18/share, plus $10 commission.

11/1/21: Little Co. paid common dividends totaling $10,000

12/31/21: Little Co. stock trading at $20/share

4/1/22: Purchased 6,000 shares at $21/share, plus $10 commission

11/1/22: Little Co. paid dividends totaling $10,000

12/31/22: Little Co stock trading at $19/share

3/1/23: Sold 1,000 shares of Little Co stock at $19.50/share, less $10 commission.

Assume Big uses FIFO to account for their investment in these shares.

Required: Prepare entries to record the preceding transactions, and answer the following questions.

Questions:

1. What is the total cost recorded as the "investment" on 1/1/21?

2. How much of an unrealized gain or loss is reported on the 2021 statement of comprehensive income ("xx,xxx gain" or "xx,xx loss")?

3. How much is received as dividends on 11/1/22?

4. What is the balance in the "investment in Little" account at 12/31/22?

5. What is our TOTAL unrealized gain or loss at 12/31/22? ("xx,xxx gain" or "xx,xxx loss")

6. How much of an unrealized gain or loss is reported on the 2022 statement of comprehensive income ("xx,xxx gain" or "xx,xxx loss")?

7. What was the gain or loss on sale of the shares on 3/1/23 ("xx,xxx gain" or "xx,xxx loss")?

Answer 1

Journal Entries in the books of Big Co.
			$
Date	Particulars		Dr.	Cr.
01-01-2021	Investment in Little Co. A/c	dr.	90000
	Commission A/c	dr.	10
	To Bank A/c			90010
11-01-2021	Bank A/c	dr.	500
	To Dividend received A/c			500
	(Dividend of $0.1/share) x 5000 shares
12-31-2021	No Entry
04-01-2022	Investment in Little Co. A/c	dr.	126000
	Commission A/c	dr.	10
	To Bank A/c			126010
11-01-2022	Bank A/c	dr.	1100
	To Dividend received A/c			1100
	(Dividend of $0.1/share) x 11000 shares
12-31-2022	No Entry
03-01-2023	Bank A/c	dr.	19490
	Commission A/c	dr.	10
	To Investment in Little Co. A/c			18000
	To Profit on sale of Investment			1500

Ans 1) Total Cost as 'Investment' on 01-01-2021 is $90,000 (5000*$18/share)

Ans 2) Unrealised gain in 2021 Comprehensive income is $10,000 {5000*$(20-18)}

Ans 3) Dividends on 11-01-22 is $1100 (11000*$0.1/share)

Ans 4) Balance in investment in Little Co A/c on 12-31-22 is $216,000 (90000+126000)

Ans 5) Total Unrealised Loss as on 12-31-22 is $7000 (216000-209000); (11000shares * $19/share)=209000

Ans 6) Unrealised Loss As on 12-31-22 is $7000

Ans 7) Gain on sale of shares on 03-01-23 is $1500.