Question

During Year 3, Gilman Co. purchased 5,000 shares of the 500,000 outstanding shares of Meteor Corp.'s common stock for $35,000. During Year 3, Gilman received $1,800 of dividends from its investment in Meteor's stock. The fair value of Gilman's investment on December 31, Year 3, is $32,000. Gilman has elected the fair value option for this investment. What amount of income or loss that is attributable to the Meteor stock investment should be reflected in Gilman's earnings for Year 3?A. Income of $4,800B. Income of $1,800C. Loss of $1,200D. Loss of $3,000

Answer 1

Answer:

correct answer is option (c) loss of $ 1,200

Explanation:

Data provided:

Purchase value of the common stock = $ 35,000

Dividends received = $ 1,800

Fair value = $ 32,000

Now,

The income from a security using fair value is calculated as:

= Dividends + (Purchase value - fair value)

Income from the stock investment

= $ 1,800 + ($ 32,000 - $ 35,000) = - $ 1,200

here, the negative sign depicts the loss

hence, the correct answer is option (c)