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Fox Co. bought 1,000 shares of Owl Co. common stock, after which Owl had 10,000 shares...

Fox Co. bought 1,000 shares of Owl Co. common stock, after which Owl had 10,000 shares authorized, 9,000 shares issued, and 8,000 shares outstanding. Fox expects to hold this stock for at least 9 months. When could Fox report a gain on its income statement?
When Owl reports net income
When Fox sells Owl common stock
When Owl declares common stock dividends
When the market price of Owl common stock increases

Solutions

Expert Solution

In the above question, FoxCo. owns 1000 shares of Owl company. If percentage ownership (of Fox Co.) has to be calculated, whether dividing by issued shares or outstanding shares of Owl Co. we get the following results,

1000 / issued shares of Owl Co. (9000) - 11.11%

1000 / outstanding shares of Owl Co. (8000) = 12.5%

It is very clear that the ownership is less than 20%.

2nd option - When Fox sells Owl common stock

Normally a company (Fox Co. in this case) invests in other corporation's shares for investment purposes. “Gain on sale of investments” is the profit made on the sale of either marketable securities or passive (not more than 20% ownership) investments in other companies. It is reported as a non-operating or "other income" item on a multiple-step income statement. It is not very clear from the question, what was the purchase price and what was the market price of Owl Co. shares at the time of sale for the 2nd option (When Fox sells Owl common stock) Hence I have mentioned a general rule.

additional notes:

3rd option  When Owl declares common stock dividends

Fox Co. has investment percentage below 20 percent, it would adopt the cost method and it would then book dividends as revenue (other revenue).

Please note, it is again not very clear by the statement "Fox expects to hold this stock for at least 9 months" whether it is a trading security or an available for sale security.

jeff jeffy answered 2 years ago
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