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Accounting for investments

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On March 31, 2005, Clique Corporation purchases 250,000 shares of Carborundum Company's common stock for $67 per share. The 250,000 shares represent 16% of Carborundum's outstanding shares. On June 30, 2005, the market price of Carborundum's stock was $45 share.

For the year ended, June 30, 2005, Carborundum's reported a net loss of $925,000; however, it paid total cash dividends in May, 2005 of $300,000.

A. Compute the carrying amount of Clique's investment in Carborundum as of June 30, 2005 assuming that Clique accounts for its investment in Carborundum as each of the following:

(i) Trading Security
(ii) Available for Sale Investment
(iii) Equity Investment (assume a significant position exists because of some options that Clique has to acquire more shares of Carborundum and that Clique can account in this manner or in the manner set forth in any of the other alternatives shown)

B. Compute the investment income reported by Clique for the 2005 fiscal year, assuming that Clique accounts for its investment in Carborundum as each of the following:

(i) Trading Security
(ii) Available for Sale Investment
(iii) Equity Investment

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(i) Trading Security

Trading securities are held for current resale. They are reported at market value, with any unrealized gains or losses of the period included in the calculation of the period's income.

The original amount is 250,000x67=16,750,000. The market price has fallen to $45, the loss of (67-45)X250,000=5,500,000 will be reported in the come and the carrying cost will be reduced accordingly. The carrying cost will be shown as ...

Solution Summary

The solution explains the accounting for investments under three methods - trading securities, available for sale and a long term investment (equity method)

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