On January 2, 2019, All Good Company purchased 12,000 shares of the stock of Big Bad Company, and DID NOT obtain significant influence.

On January 2, 2019, All Good Company purchased 12,000 shares of the stock of Big Bad Company, and DID NOT obtain significant influence. The investment is intended as a long-term investment. The stock was purchased for $13 per share, and represents a 10% ownership stake. Big Bad Company made $300,000 of net income in 2019, and paid dividends to All Good Company of $10,000 on December 15, 2019. On December 31, 2019, Big Bad Company's stock was trading on the open market for $12.50 per share at the end of the year. Use this information to determine the unrealized gain or loss on the investment that should be reported at year end by All Good Company. If it is a loss, enter as a negative number. Round to nearest whole dollar.

Solutions

Expert Solution

Cost of investment by All Good Company = No. of shares purchased * Purchase Price per share

= 12000 * $13

= $156,000

Value per share of All Good Company at the end of the year = $12.50

Hence, total value at the end of the year = No. of shares held * Price per share

= 12000 * $12.50

= $150,000

Unrealized loss per share to be recognised = ($12.5 - $13) = -$0.5

Total unrealized loss to be recognised = No of shares held * Unrealized Loss per share

= 12000 * -$0.5 = -$6,000

Alternatively, it can aslo be calculated as ,

Unreliazed gain/(loss) = Total value at the end of the year - Cost of investment

= $150,000 - $156,000 = -$6,000

ekkarill92 answered 2 years ago

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