Question
In: Accounting
Big Co. purchases shares of Little Co starting on 1/1/21. Little Co. has 100,000 shares of...
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")?
Solutions
Expert Solution
We have taken that the shares are purchased for long term strategic purpose. Hence recoding them as available for sale.
| 1 | What is the total cost recorded as the "investment" on 1/1/21? | $ 90,010.00 |
| 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")? | $ 9990 gain |
| 3 | How much is received as dividends on 11/1/22? | $ 1,100.00 |
| 4 | What is the balance in the "investment in Little" account at 12/31/22? | $ 209,000.00 |
| 5 | What is our TOTAL unrealized gain or loss at 12/31/22? ("xx,xxx gain" or "xx,xxx loss") | $ 17010 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")? | $ 7,020.00 |
| 7 | What was the gain or loss on sale of the shares on 3/1/23 ("xx,xxx gain" or "xx,xxx loss")? | $ 1488 gain |
| Journal | |||
| Date | Account Title and Explanations | Amount ($) | |
| Debit | Credit | ||
| 01.01.2021 | Investment | 90,010.00 | |
| To Bank | 90,010.00 | ||
| (Being investment purchased) | |||
| 11.1.2021 | Bank | 500.00 | |
| To Dividend | 500.00 | ||
| (Being dividend received) | |||
| 12.31.2021 | Investment | 9,990.00 | |
| To Investment Reserves | 9,990.00 | ||
| (Being investment recognized at fair value) | |||
| 04.01.2022 | Investment | 126,010.00 | |
| To Bank | 126,010.00 | ||
| (Being investment purchased) | |||
| 11.1.2022 | Bank | 1,100.00 | |
| To Dividend | 1,100.00 | ||
| (Being dividend received) | |||
| 12.31.2022 | Investment Reserves | 17,010.00 | |
| To Investment | 17,010.00 | ||
| (Being investment recognized at fair value) | |||
| 03.01.2023 | Bank | 19,490.00 | |
| To Investment | 18,002.00 | ||
| To Investment Reserve | 638.18 | ||
| To Profit/Loss | 849.82 | ||
| (Being investment sold recognized the amount through investment reserve and excess amount to profit and loss) | |||
| Total | 264,110.00 | 264,110.00 |
| Calculation of Profit or Loss - | Amount ($) |
| Sale Amount | 19,490.00 |
| (-) Purchase Amount | 18,002.00 |
| Profit | 1,488.00 |
| Investment Reserve | 638.18 |
| Profit and Loss Account | 849.82 |
| Investment | |||||
| S.no | Particulars | Amount (Dr.) | S.no | Particulars | Amount (Cr.) |
| 01.01.2021 | To Bank | 90,010.00 | 12.31.2021 | By Balance c/d | 100,000.00 |
| 12.31.2021 | To Investment Reserve | 9,990.00 | |||
| 100,000.00 | 100,000.00 | ||||
| 04.01.2022 | To Balance b/d | 100,000.00 | |||
| 04.01.2022 | To Bank | 126,010.00 | 12.31.2022 | By Investment Reserve | 17,010.00 |
| 12.31.2022 | By Balance c/d | 209,000.00 | |||
| 226,010.00 | 226,010.00 | ||||
| 03.01.2023 | To Balance b/d | 209,000.00 | 03.01.2023 | By Bank | 19,490.00 |
| To Investment Reserve | 638.18 | By Balance c/d | 190,998.00 | ||
| To Profit and Loss | 849.82 | ||||
| 210,488.00 | 210,488.00 |
| Investment Reserve | |||||
| Date | Particulars | Amount (Dr.) | Date | Particulars | Amount (Cr.) |
| 12.31.2021 | To Balance c/d | 9,990.00 | 12.31.2021 |
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Flag this Question
Question 11 pts
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