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Chapter 10: 1RQ (page 566)
What is a debt security?
Security reflecting the terms and conditions of the debt is known as debt security.
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What method is used for investments in equity securities when the investor has significant influence and typically 20% to 50% ownership? Briefly describe how dividends declared and received and share of net income are reported.
When disposing of an available-for-sale debt investment, where is the gain or loss on disposal reported in the financial statements?
As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values.
Requirements
1. What would the effect be to stakeholders if such losses were not reported in a timely way?
Accounting for equity investments
On January 1, 2018, Bark Company invests \(10,000 in Roots, Inc. stock. Roots pays Bark a \)400 dividend on August 1, 2018. Bark sells the Roots’s stock on August 31, 2018, for $10,450. Assume the investment is categorized as a short-term equity investment and Bark Company does not have significant influence over Roots, Inc.
Requirements
1. Journalize the transactions for Bark’s investment in Roots’s stock.
On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation’s investment in Small Town bonds during 2018.
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