Gioia Company acquired some of the 69,000 shares of outstanding common stock (no

Question

Gioia Company acquired some of the 69,000 shares of outstanding common stock (no par) of Tristezza Corporation during 2014 as a long-term investment. The annual accounting period for both companies ends December 31. The following transactions occurred during 2014:

Jan. 10 Purchased 19,875 shares of Tristezza common stock at $13 per share.

Dec. 31 a. Received the 2014 financial statements of Tristezza Corporation that reported net income of $87,000. b. Tristezza Corporation declared and paid a cash dividend of $1.00 per share.   c. Determined the market price of Tristezza stock to be $12 per share.

Required:

1. On the current year cash flow statement, how would the investing section of the statement be affected by the preceding transactions?

2. On the current year cash flow statement (indirect method), how would the equity in the earnings of the affiliated company and the dividends from the affiliated company affect the operating section?

Explanation / Answer

It is assumed that the current year cash flow statement of Gioia Company is required to be analysed Cash Flow from Investing Activities $ Purchase of Common Stock in Tristezza Corporation -258375 Cash Outflow since money is going out 2. Cash Flow of Affiliated Company (viz. Gioia Company) Cash Flow from Operating Activities $ Income from Tristezza Corporation 25059.78 Dividend Income from Tristezza Corporation 19875

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