Question

1)On 1/1/19, Investor paid $200,000 for 10,000 shares (which is 10% ownership) of Gamma common stock. Gamma reported net income of $65,000 for 2019. The fair value of the Gamma stock on 12/31/19 was $27/share. What amount will be reported in Investor’s balance sheet for the investment in Gamma at December 31?

2) Bob had net income of $200,000 and declared preferred dividends of $25,000 during the current year. He began the year with 20,000 common shares outstanding. He issued 30,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1. Compute the weighted-average common shares outstanding for the year.

3)Compute Bob's basic EPS for the year.

4)Tim had net income of $500,000 for both last year and the current year. The shares outstanding for the prior year was 100,000 shares for the whole year. On December 1 of the current year, he declared a two-for-one stock split. There were no other stock transactions in either year. Compute the EPS that would be shown on a comparative income statement for Years 1 and 2 (In other words, what are EPS for Years 1 and 2 on a split-adjusted basis?)

Answer 1

i) If investor is holding such investment for long term perspective it can record the investment basis upon the either cost or fairvalue method.

Under cost method - Investment shall be recorded at $200,000

Under Fair value method - Investment shall be recorded at $270,000

If Investor is company/entity on which IFRS is applicable, Such investment shall be valued at fair value only i.e $270,000

If investor is holding such investment for short term period just to earn gain from fluctuation of market, he can carry such investment at fair value of investment i.e $270,000.

ii)

iii)