Question

All of the following are reported at fair value except

A. Trading securities

B. Held to maturity securities

C. Available for sale securities

D. All of these options are reported at fair value

On January 1 of the current year, Winters Corporation acquired 10% of the outstanding common stock of Summers Corporation for $420,000. For the current year, Summers Corporation reported net income of $80,000 and paid cash dividends of $25,000. At the end of the year, the carrying value of Winters’ investment in Summers Corporation would be

$428,000.

$500,000.

$425,500.

$420,000.

Answer 1

Answer to 1st question: Option(B) Held to Maturity Securities:

Reason:

Held to Maturity securities are debt securities which th company has intention to hold till maturity. These are reported at amortized cost.

Whereas Trading securities and Available for sale securities are debt and equity securities both of them are reported at Fair Value.

Answer to Question No.2: Option(D) $420,000

Reason:

There are two methods of accounting for investment: Cost & Equity Method. Usually cost method used when the investment result in a owneship stake of less than 20% whereas equity method used when ownership stake of 20% or more(significant beneficial ownership).

In the present scenario cost method should be employed since the stake is 10%. The sharess are valued at Cost Price regardless of their current value.

If the cash dividend received it should be added to the company's income statement.Under cost method dividends are treated as income unlike in equity method where initially investment value recorded at cost and subsequentlly diividend not treated as income it will be adjussted with carrying value of investment.

hence in the present case carrying value of investment is$420,000 shown under balancesheet of company.

Cash dividend would $25000 woulld be reported as income under Income Statement.