Early last year, ABC INC. invested $400,000 in cash in the capital stock of M&M and ZOO INC. During the first year that these securities were held, M&M paid dividends of $4.92 per share, and ZOO paid no dividends. At December 31 of last year, the following values were reported:

COST CURRENT MARKET

VALUE

M&M (2000 shares, cost $100 per share; market, $80 per share) $200,000 $160,000

ZOO (10,000 shares, cost $20 per share; market, $24 per share) $200,000 $240,000

Early in the current year, ABC sold 500 shares of M&M and 1,000 shares of ZOO at the market. Ten minutes later, the broker reported that both transactions had been executed. The total sale proceeds were $42,500 for the M&M shares and $23,000 for the ZOO a shares.

INSTRUCTIONS:

a. Separately compute ABCs unrealized holding loss/gain in each of these investments as of December 31 of last year. Indicate the total unreal holding loss/gain that will appear in last years financial statements, and explain where in these statements this amount will appear

B. Prepare two separate journal entries to record the sale of the M&M and ZOO securities early in the current year.

c. Briefly comment about the liquidity, risks, and potential return of investments in capital stocks relative to cash equivalents that are very safe and yield a sure return of, say, 5%. Cite data from this problem in support of your comments.