On January 2, 2010, Reynolds Corporation bought 15 percent of Scorpio Corporation's capital stock for $60,000 and classified it as available-for-sale securities. Scorpio's net incomes for the years ended December 31, 2010, and 2011, were $20,000 and $100,000, respectively. During 2011, Scorpio declared a dividend of $140,000. No dividends were declared in 2010. On December 31, 2011, the fair value of the Scorpio stock owned by Reynolds had increased to $90,000. How much should Reynolds show on its 2011 income statement as income from this investment?

Question

Quizplus · Accepted Answer

The available-for-sale securities are reported at fair value on the statement of financial position. Therefore, the increase in fair value of the Scorpio stock from $60,000 to $90,000 should be recognized as an unrealized gain and reported as other comprehensive income (OCI) on the statement of comprehensive income. For Reynolds' income statement, the only relevant amount to include is the dividend received, which is $140,000 x 15% = $21,000. Therefore, the correct answer is choice C.

On January 2, 2010, Reynolds Corporation Bought 15 Percent of Scorpio