Question #21

Reading: Reading 8 Intercorporate Investments

PDF File: Reading 8 Intercorporate Investments.pdf

Page: 9

Status: Correct

Correct Answer: A

Part of Context Group: Q20-21
Shared Context
of 84 Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. Milburne choose FVOCI classification for these shares. The impact of the Marino holding on the Milburne income statement is: A) $300. B) -$4,700. C) -$5,000. On January 9, 2006, Company X paid $2,000,000 for 100,000 shares of stock in Company S. Originally the company classified the shares as fair value through OCI. As of December 31, the stocks were valued at $2,200,000. In 2006, Company S had earnings per share of $0.90 and paid dividends per share of $0.20. In late December 2006 the company wonders what would be the change if the company had classified the shares as fair value through P&L.
Question
If the shares were classified as fair value through P&L, what would have been the impact on the income and the stockholders' equity of Company X?
Answer Choices:
A. Income and stockholder's equity will rise by $200,000
B. Stockholders' equity will rise by $200,000, but income will not change
C. Income will rise by $200,000, but stockholders' equity will not change
Explanation
The unrealized gain of $200,000 would have been reported on the income statement. Assets and equity would be the same under either classification.
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