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(Solution) Clay sold its investment in Firm A for €44.50 per share

Clay sold its investment in Firm A for €44.50 per share

Clay Company owns the following marketable securities, all of which were purchased at the beginning of 2021:

Firm # Shares Owned by Clay Ownership Held by Clay Clay’s Cost Market Value (12/31/21) Annual Dividend Total 2021 Earnings
A 50,000 15% €40.00 €46.00 €0.75 €50,000
B 100,000 25% €10.00 €12.00 €0.30 €100,000
C 75,000 10% €25.00 €24.00 €0.60 €80,000

Clay Company follows International Financial Reporting Standards (IFRS).

9. On January 31, 2022, Clay sold its investment in Firm A for €44.50 per share. If the investment is reported at fair value through profit and loss, what is the impact of the sale on Clay’s 2022 pretax income?
a. €75,000 net loss
b. €225,000 net gain
c. €2,225,000 net gain

 

See also (Solution) Carrying value of Clay Company’s marketable securities

 

Solution

To determine the impact of the sale of Clay Company’s investment in Firm A on its 2022 pretax income, we will follow a detailed step-by-step calculation. Correct

Firm A’s Investment

  • Shares Owned: 50,000
  • Cost per Share: €40.00
  • Market Value at Year-End (2021): €46.00
  • Sale Price per Share on January 31, 2022: €44.50

Related Answer : (Solution) Clay is considering reclassifying its investment in Firm C from fair value

Step 1: Calculate the Sale Price of Firm A’s Investment

To find the total sale price of Firm A’s shares:

Total Sale Price=Sale Price per Share×Number of Shares
=€44.50×50,000=€2,225,000

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