Reading 33: Understanding the Balance Sheet-LOS f 习题精选 2011, accounting, company, related, assets

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Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 33: Understanding the Balance Sheet

LOS f: Demonstrate the appropriate classifications and related accounting treatments for marketable and nonmarketable financial instruments held as assets or owed by the company as liabilities.

 

 

At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Beta’s stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security?

Available-for-sale

Trading security

A) $2,000 $22,000

B) $2,000 $20,000

C) $0 $22,000

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Unrealized gains and losses from trading securities are recognized in the income statement while unrealized gains and losses from available-for-sale securities bypass the income statement and are reported as other comprehensive income, a component of stockholders’ equity. Cash dividends are recognized in the income statement for both trading and available-for-sale securities. Thus, Alpha will recognize only the $2,000 dividend if the shares are considered available-for-sale and will recognize $22,000 ($2,000 dividend + $20,000 unrealized gain) if the shares are considered trading securities.