8. Assume the following facts At the beginning of the year, ABS Inc. purchased 1
ID: 2554394 • Letter: 8
Question
8. Assume the following facts At the beginning of the year, ABS Inc. purchased 10,000 common shares of XYZ for $20 cash per share. XYZreported annual net income of $100,000 and declared a $1.00 per share dividend. End of year price was $25 per share Calculate and explicitly show the 1) investment on balance sheet in XYZ at the end of the year, 2) income reported on income statement, and 3) amount reported in other comprehensive gain or loss for each of the following independent scenarios: ABS purchased 15% of XYZ's common stock and correctly classified it as an available for sale security. (3 points) A, B. ABS purchased 15% of XYZ's common stock and correctly classified it as a trading security. (3 points) C. ABS purchased 30% of XYZ's common stock and correctly employed the equity method of accounting. (3 points) D. ABS purchased 10% of the common stock. XYZ was not publicly traded during the entire year (3 points) E. Referring back to scenario C, what adjustments to the cash flow statement are necessary? (2 points)Explanation / Answer
Common Shares purchases
10000
Purchase Price
20
% of shareholding
15%
Dividend per share
1
End of year Price
25
A.
Available for Sale
1) Investment in Balance Sheet of XYZ
Balance Sheet of AbS Inc. as on
Particulars
Amount
Assets
Current Assets
Investment
Available for sale securities
= 10000 * 25
250000
250000
2) Income reported
Income Statement of ABS Inc. for the year ended
Particulars
Amount
Other Income
Dividend Received
= 10000 * 1
10000
10000
3) Amount reported in other Comprehensive Income
Income Statement of ABS Inc. for the year ended
Particulars
Amount
Other Comprehensive Income
Gain on Available for sale securities
= 10000 * (25 - 20)
50000
50000
B.
Trading Security
1) Investment in Balance Sheet of XYZ
Balance Sheet of AbS Inc. as on
Particulars
Amount
Assets
Current Assets
Investment
Available for sale securities
= 10000 * 25
250000
250000
2) Income reported
Income Statement of ABS Inc. for the year ended
Particulars
Amount
Gain on securities
= 10000 * (25 - 20)
50000
Dividend Received
= 10000 * 1
10000
60000
3) Amount reported in other Comprehensive Income
No reporting as the securities are trading securities
C.
Equity Method
1) Investment in Balance Sheet of XYZ
Balance Sheet of AbS Inc. as on
Particulars
Amount
Amount
Assets
Non - Current Assets
Investment
Investment in Associates
= 10000 * 20
200000
Add: Revenue from XYZ
=100000*15%
15000
Less: Dividend Received
= 10000 * 1
-10000
205000
2) Income reported
Income Statement of ABS Inc. for the year ended
Particulars
Amount
Other Income
Investment Revenue
=100000*15%
15000
15000
3) Amount reported in other Comprehensive Income
No reporting as the securities are accounted by equity method
D.
Not publicly traded
1) Investment in Balance Sheet of XYZ
Balance Sheet of AbS Inc. as on
Particulars
Amount
Assets
Non -Current Assets
Investment
Shares of XYZ
= 10000 * 20
200000
200000
2) Income reported
Income Statement of ABS Inc. for the year ended
Particulars
Amount
Other Income
Dividend Received
= 10000 * 1
10000
10000
3) Amount reported in other Comprehensive Income
No reporting as the securities are not publicly traded
Common Shares purchases
10000
Purchase Price
20
% of shareholding
15%
Dividend per share
1
End of year Price
25
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.