Investments. Clarence’s Chief Financial Officer loves to invest, so he uses Clarence’s money to
invest in shares of other companies’ stock. On 1/1/2007, Clarence purchased 1,000 shares of
Llama Corporation. During fiscal 2008, Clarence purchased 1,000 shares of Goat Corporation.
The Llama shares were purchased for $10.50 per share and the Goat shares were purchased for
$7.20 per share.
At the end of fiscal 2007, the fair market value of Llama was $10.90/share. At the end of fiscal
2008, the shares of Llama and Goat were worth $10.50 and $7.20 per share, respectively. Llama
Corporation declared and paid cash dividends of $0.75 per share in both 2007 and 2008; Goat
Corporation declared and paid a cash dividend of $0.50 per share in fiscal 2008.
Clarence’s share of Llama’s stockholders’ equity at the date of purchase was 10,000, with the
entire difference between cost and book value attributable to equipment with a remaining useful
life of five years (Llama uses straight-line for all depreciation and amortization). Llama’s total
net income was $3,000 in 2007 and $3,500 in 2008.
2. HW4 – 8 points
a. What is the effect of the investment in Llama Company on net income
and comprehensive income in fiscal 2008 under each of the following
classifications for investments. If not zero, you must provide an amount
and a sign (+ for increase income, – for decrease income).
Available for Sale Trading
________________________________________________________________________
Effect on net
income
___________________________________________________________________
Effect on
comprehensive
income
b. If the equity method were used to account for the investment in Llama,
what is the balance in the investment in Llama account as of 12/31/07
(assume 30% ownership for this question)?
c. If the investment in Goat is accounted for as an available-for-sale
security, what is its value in the assets section of the balance sheet as of
12/31/08?
d. If the investment in Goat is accounted for as a trading security, what is
its value in the assets section of the balance sheet as of 12/31/08?
