[k3s0504]

I'm having trouble with the following problems:

1. Horne Corporation purchased 3,000 shares of Flynn Company's common stock for $12 per share as a long-term available-for-sale investment on June 30, 2011. Flynn declared and paid a cash dividend of $1.00 per share on its common stock on September 30, and had a closing fair value of $18 per share on December 31. Assuming this investment is appropriately accounted for using the fair value method, it will increase Horne's 2011 income before taxes by...

For this problem, I calculated:
3,000 x 12 = 36,000
36,000 - 3,000(1.00) = 33,000
Fair value: 3,000 x 18 = 54,000

Increase income by 54,000 - 33,000 = 21,000?

#2:

Merlin Inc. accounts for its investment in Tolan Corporation using the fair value method. Merlin bought 3,000 shares (5%) of Tolan's outstanding common stock for $28 per share on 1.1.2011. Tolan earned $3 per share foe 2011, declared and paid cash dividends of $1 per common share, and had a closing fair value of $24 per share on December 31. The reported balance sheet value of merlin's investment in tolan at 12.31.2011 is______

I have absolutely no clue where to even start for #2.

[Just Looking]

Problem #1
Your answer is not correct. You need to think about what goes on the balance sheet versus the income statement. There are three things to consider in the question:

1. The original purchase of the security. Do you know what the entry would be? Is this an asset or an income item?

2. The dividend. Is this an asset or income?

3. The increase in fair market value. There are 3 types of securities.
a) Held to maturity securities (refers to bond that are expected to be held until they mature)
b) Trading securities (securities that are purchased with the intent to sell them within a short time of purchase)
c) Available for sale securities (a catch-all for anything else, securities that will be sold when it makes sense to sell them - could be long or short term, but the intent is not to be short term necessarily)

To determine how the gain in FMV is treated, look at the rules for "b" and "c" in your text book. Is the gain recognized on the Income Statement? It will be more meaningful for you if you figure it out, but I will verify your understanding.

Problem #2
This is similar to #1, except they are asking for asset account balance. If you understand #1, #2 will be easier. Let's concentrate on #1 until it makes sense to you.

[k3s0504]

Long term investments are entered as an asset.
I'm not really sure what the dividend is...
And I think the problem stated that it was available for sale securities (investment)

Available for sale securities are classified as current assets in the balance sheet if intended to sell in the next year...

[Just Looking]

You are right that the investments are entered as an asset (could be long-term or current when it is an available for sale security - in this question it states it is long-term). Dividends are revenue, shown under the Other Income section of the Income Statement.

There are two sides to the gain. You are right that the asset will be increased by the gain (the debit side). The question remaining is how to treat the credit side of the gain. It is different for trading securities and available for sale securities. Gains on trading securities are shown on the income statement. Gains on available for sale securities are shown on the Balance Sheet as a change in Equity. I can explain the reason if you want to know.

Going back to the original question, they want to know what will be shown on the Income Statement. Can you answer that now?

[k3s0504]

Ok. Since the 3,000 shares purchased at $12 per share is a long-term available for sale investment, which is shown on the balance sheet, we don't need to worry about that. Therefore, the only thing that is shown on the income statement is the dividends... so is it only a gain of $3,000? (3,000 x $1.00)

[Just Looking]

Ok. Since the 3,000 shares purchased at $12 per share is a long-term available for sale investment, which is shown on the balance sheet, we don't need to worry about that. Therefore, the only thing that is shown on the income statement is the dividends...so is it only a gain of $3,000? (3,000 x $1.00)

Perfect. :)

[k3s0504]

Awesome. I'm learning much more than I am in class. Thank you.

[Just Looking]

You're welcome.