1. 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

Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts.

Short Answer

Expert verified

Answer

Accounts

Balances

Equity investment – Taylor

$700,000

Equity investment – Josh

$65,000

Dividend revenue

$3,450

Revenue from investment

$20,000

Step by step solution

01

Definition of Return on Investment

A metric used by the analyst to evaluate the performance of any investment is known as return on investment. It is a determinant of the profitability of the investment.

02

Posting into Investment Accounts and Investment Income Accounts

Equity investment – Taylor

Date

Particulars

Amt $

Date

Particulars

Amt $

Beginning balance

$700,000

15 Dec

Cash

$20,000

31 Dec

Revenue from investment

$20,000

31 Dec

Balance c/d

$700,000

$720,000

$720,000

Equity investment – Josh

Date

Particulars

Amt $

Date

Particulars

Amt $

3 March

Cash

$65,000

31 Dec

Balance c/d

$65,000

$65,000

$65,000

Dividend revenue

Date

Particulars

Amt $

Date

Particulars

Amt $

31 Dec

Balance c/d

$3,450

15 May

Cash

$3,450

$3,450

$3,450

Revenue from investment - Taylor

Date

Particulars

Amt $

Date

Particulars

Amt $

31 Dec

Balance c/d

$20,000

31 Dec

Equity investment

$20,000

$20,000

$20,000

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Most popular questions from this chapter

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

2. Classify and prepare a partial balance sheet for Strategic’s Phyflexon investment as of December 31, 2018.

What adjustment must be made at the end of the period for trading debt investments and available-for-sale debt investments?

What is comprehensive income, and what does it include?

What does the rate of return on total assets measure, and how is it calculated?

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.

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