Question

On January 2, 2017, Alpha Company purchased 10,000 shares of the stock of Zulu Company, and did not obtain significant influence. The investment is intended as a long-term investment. The stock was purchased for $10 per share, and represents a 10% ownership stake. Zulu Company made $25,000 of net income in 2017, and paid dividends of $10,000 on December 15, 2017. On December 31, 2017, Zulu Company's stock was trading on the open market for $12 per share at the end of the year. Use this information to determine the dollar amounts that should be reported by Alpha Company during 2017 for the following items: 1. Dividend Income 2. Unrealized Gain/Loss - OIC (If a loss, enter the amount with dollar sign inside of brackets) 3. Available-for-Sales Securities Question 5 options: 1,000

Answer 1

Answer 2

 Calculation:

1. Dividend Income (10% of Dividends Paid by Zulu)

• Zulu paid $10,000 in dividends.

• Alpha owns 10%, so:

  $$\text{Dividend Income}=10\mathrm{\%}\times \mathrm{\$}10,000=\mathrm{\$}1,000$$

   

2. Unrealized Gain (Other Comprehensive Income - OIC)

• Initial Investment: 10,000 shares × $10 = $100,000

• Year-End Market Value: 10,000 shares × $12 = $120,000

• Unrealized Gain: $120,000 - $100,000 = $20,000
   

3. Available-for-Sale Securities (Balance Sheet Reporting)

• The investment is classified as available-for-sale (AFS) (since it’s long-term but not influential).

• On the balance sheet, it’s reported at fair market value:

  $$\text{AFS Securities}=10,000\times \mathrm{\$}12=\mathrm{\$}120,000$$

   

---

Key Notes:

• Net Income Ignored: Since Alpha lacks "significant influence" (<20% ownership), Zulu’s $25,000 net income doesn’t affect Alpha’s books.

• Dividends ≠ Earnings: Dividends are income; stock price changes go to OIC (not the income statement).

Answer:

1. Dividend Income: $1,000

2. Unrealized Gain (OIC): $20,000

3. Available-for-Sale Securities (Year-End Value): $120,000