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Chapter 10: Q. 4SE_1 (page 567)

Question: S10-4 Accounting for equity investments

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements

Identify what type of investment the Farrier stock is for Bryant.

Short Answer

Expert verified

Bryant will report investment in Farrier as a significant influence - equity investment.

Step by step solution

01

Definition of Voting Stock

The stock of shares that will provide voting rights in the general meeting of the shareholders is known as voting stock. It includes the shares of the common stock.

02

Type of Investment

Calculation of percentage of voting stock held by Bryant Inc:

Votingstock=SharespurchasedTotaloutstandingvotingstock×100=3,75015,000×100=25%

Voting stock falls between 20% to 50%. Therefore, Bryant will have significant influence over Farrier Inc.

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Most popular questions from this chapter

Question: S10-4 Accounting for equity investments

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements

3. In what category and value would Bryant report the investment on the December 31, 2018, balance sheet?

Why would a company invest in debt or equity securities?

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

Journalize the transactions for Josh’s investment in Jackrabbit, Inc. for 2018.

Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better. After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, “We’ve decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.” Carl made the adjustments even though he doesn’t think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company’s travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

What type of information in the financial reports would have helped the bank detect this reclassification?

How are held-to-maturity debt investments reported on the financial statements?
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