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Chapter 10: 1TI (page 549)

Match the key term to the scenario.

1. Available-for-sale debt investments.

a. Jane owns 53% of Richard’s Roses’s voting stock.

2. Controlling interest equity investments.

b. Joe owns debt security in Bones, Inc. and intends to hold it until maturity.

3. Trading debt investments.

c. Jeannie owns a debt security in Cricket, Inc. and plans on selling the debt after one year.

4. Held-to-maturity debt investments.

d. Jimenez owns 5% of Delgado, Inc.’s voting stock but does not have the ability to participate in the decisions of Delgado, Inc.

5. Significant influence on equity investments.

e. Jacob owns 24% of Pay, Inc.’s voting stock and has the ability to exert influence over Pay, Inc.

6. No significant influence on equity investments.

f. Jim owns a debt security in Tag, Inc.’s and plans on holding the debt for only a week.

Short Answer

Expert verified

a. Jane owns 53% of Richard’s Roses’s voting stock.

2. Controlling interest equity investment.

b. Joe owns a debt security in Bones, Inc. and intends to hold it until maturity.

4. Held to maturity debt investment.

c. Jeannie owns a debt security in Cricket, Inc. and plans on selling the debt after one year.

3. Trading debt investment.

d. Jimenez owns 5% of Delgado, Inc.’s voting stock but does not have the ability to participate in the decisions of Delgado, Inc.

6. No significant influence on equity investments.

e. Jacob owns 24% of Pay, Inc.’s voting stock and has the ability to exert influence over Pay, Inc.

5. Significant influence on equity investments.

f. Jim owns a debt security in Tag, Inc.’s and plans on holding the debt for only a week.

1. Available for sale debt investment.

Step by step solution

01

Definition of Debt Security

Debt Security can be defined as the instrument issued by the borrower to generate cash for the business entity. Such instruments also carry an interest rate known as the coupon rate.

02

Matching Key Terms

  1. Controlling interest equity investment includes the investment made in the business entity’s equity capital, equal to or more than 51% of total equity.
  2. When the debt is held up to its maturity date, such debts are known as hold to maturity debt.
  3. Debt investments acquired with a view of selling after one year are considered a trading investment in the debt.
  4. Debt held to generate gain due to a rise in price within a short period is known as available for sale debt securities.
  5. If the percentage of equity held is between 20 to 50% of the outstanding stock, it will be considered a significant influence on equity investment.

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Most popular questions from this chapter

Question: P10-25 Accounting for debt and equity investments

This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.

Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe.

7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison.

10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31.

Sep. 30 Received dividends of \)0.15 per share from Adobe.

Nov. 1 Received dividends of \(0.30 per share from Bison.

Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes.

31 Bison Backpacks reported net income of \(30,000 for the year.

31 Adjusted the Adobe stock for a market value of \)2.98 per share.

Requirements

1. Journalize the transactions including any entries, if required, at December 31, 2019.

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock.

Dec. 31 Adjusted the investment to its current market value of \(45 per share.

31 Phyflexon reported net income of \)330,000 for the year ended 2018.

Requirements

1. Journalize Strategic’s investment transactions. Explanations are not required.

On August 20, 2018, Mraz, Co. decides to invest excess cash of \(2,500 by purchasing Virginia, Inc. bonds. At year-end, December 31, 2018, the market price of the bonds was \)2,000. The investment is categorized as available-for-sale debt. Journalize the adjusting entry needed at December 31, 2018.

Lee Co. reported the following items on its 2018 financial statements:

Total Assets, December 31, 2018

$10,000

Total Assets, December 31, 2017

15,000

For year ended December 31, 2018

Interest Expenses

150

Net income

850

Determine Lee’s rate of return on total assets for 2018.

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment.

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment.

31 Received Taylor’s annual report showing \(100,000 of net income.

31 Received Josh’s annual report showing \)620,000 of net income for the year.

31 Taylor’s stock fair value at year-end was \(620,000.

31 Josh’s common stock fair value at year-end was \)14 per share.

Requirements

Prepare Text Source’s partial balance sheet at December 31, 2018, from your answers in Requirement 2.

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