On January 2, 2012, Murray Corporation bought 15 percent of Castro Corporation's capital stock for $60,000 and classified it as available-for-sale securities. Castro's net income for the year ended December 31, 2012, was $100,000. During 2012, Castro declared a dividend of $140,000. On December 31, 2012, the fair value of the Castro stock owned by Murray had increased to $90,000. How much should Murray show on its 2012 income statement as income from this investment?

Question

Quizplus · Accepted Answer

Murray Corporation should recognize its proportionate share of Castro Corporation's net income as unrealized gain on the available-for-sale securities, which is 15 percent x $100,000 = $15,000.
Murray Corporation should also recognize its proportionate share of the dividend declared by Castro Corporation, which is 15 percent x $140,000 = $21,000.
The increase in the fair value of the available-for-sale securities is recognized as unrealized gain but is not reported on the income statement. Therefore, the income from this investment to be shown on Murray Corporation's 2012 income statement is $15,000 + $21,000 = $36,000.

On January 2, 2012, Murray Corporation Bought 15 Percent of Castro