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Chapter 10: Q. 7RQ (page 566)

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.

Short Answer

Expert verified

When the investor has ownership between 20% to 50%, the equity method is used for accounting purposes. Declaration of dividends will decrease the investment while net income increases the investment value.

Step by step solution

01

Definition of Net income

After adjusting all the sacrifices made, the benefits calculated for the business entity are known as net income. It includesadjustment of tax expensesas well.

02

Accounting for investment

The investor has significant influence over the business entity and has ownership of 20% to 50%; therefore,the equity method will be used for accounting for such investment.

Under Equity accounting:

  1. Declaration and receipt of dividends will reduce the investment value.
  2. Share of net income will increase the investment value.

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Most popular questions from this chapter

Accounting for equity investments

Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon’s voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.28 per share on the Velcon stock.

Dec. 31 Adjusted the Velcon investment to its current market value of $58.

Requirements

What account(s) and amount(s), if any, would be reported on Captain’s income statement for the year ended December 31, 2018?

Question: E10-11 Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018

Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years.

Jun. 30 Received an interest payment from Vedder.

Dec. 31 Received an interest payment from Vedder.

31 Adjusted the investment to its current market value of \)396,000

Requirements

Journalize Peyton’s investment transactions. Explanations are not required.

When disposing of an available-for-sale debt investment, where is the gain or loss on disposal reported in the financial statements?

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)

Requirements

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

Where on the financial statements is an unrealized holding gain or loss on available-for-sale debt investments reported?
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