Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, passive investment and classifies it as a available-for-sale security the investment will appear in the December 31, 2005 balance sheet at what amount?

Question

Quizplus · Accepted Answer

As per the given information, Ashley Company purchased 2,000 out of 10,000 outstanding shares of Judd, Inc.'s common stock. It means Ashley Company owns 20% (2,000/10,000) of the outstanding shares of Judd, Inc.

As Ashley Company accounts for the investment as a minority, passive investment and classify it as an available-for-sale security, they will report this investment at fair value on the balance sheet. At the end of 2005, the market value of a share of Judd, Inc. stock increased to $32 per share.

Therefore, the fair value of Ashley Company's investment will be calculated as follows:
Fair value of investment = Number of shares owned x Market value per share
Fair value of investment = 2,000 x $32
Fair value of investment = $64,000

Hence, the investment will appear in the December 31, 2005 balance sheet at $64,000. Option C is the correct answer.

Ashley Company Purchased 2,000 of the 10,000 Outstanding Shares of Judd