On July 1, 2016, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 of the 18,000 outstanding shares of the nonvoting preferred stock of Nature Company for $30 per share. The records of Nature Company reflect the following: The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2016 would be which of the following?
A)$179,800.
B)$162,000.
C)$182,000.
D)$197,800.

Question

On July 1, 2016, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 of the 18,000 outstanding shares of the nonvoting preferred stock of Nature Company for $30 per share. The records of Nature Company reflect the following:  The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2016 would be which of the following?
A)$179,800. 
B)$162,000. 
C)$182,000. 
D)$197,800.

Quizplus · Accepted Answer

The cost of the investment is calculated by multiplying the purchase price per share ($30) by the number of shares purchased (6,000): $30 x 6,000 = $180,000.
Since the investment is classified as available-for-sale, any change in the fair value of the investment is reported in other comprehensive income. There is no indication of a change in fair value in the problem, so the carrying value of the investment on the balance sheet is simply the cost of the investment: $180,000.
However, the problem states that the Nature Company's records show that the preferred stock has a dividend rate of 5%. This means that Wildlife Supply Company can expect to receive dividend payments of $1.50 per share ($30 x 5%) each year. Since Wildlife owns 6,000 shares, it can expect to receive $9,000 ($1.50 x 6,000) in dividend income each year. This income is reported on the income statement, not the balance sheet.

On July 1, 2016, as a Long-Term Investment in Available-For-Sale