Chapter 10: Q.10.20GPA_2 (page 572)

Question: P10-20A Accounting for equity investments
The beginning balance sheet of Waterfall Source Co. included a $400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:
Mar. 3 Purchased 4,000 shares at $11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.
May 15 Received a cash dividend of $0.61 per share on the Lili investment.
Dec. 15 Received a cash dividend of $70,000 from Evan investment.
31 Received Evan’s annual report showing $300,000 of net income.
31 Received Lili’s annual report showing $120,000 of net income for the year.
31 Evan’s stock fair value at year-end was $390,000.
31 Lili’s common stock fair value at year-end was $12 per share.
Requirements
2. Post transactions to T-accounts to determine December 31, 2018, balances related to the investment and investment income accounts.

Short Answer

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Answer

Accounts	Balances
Equity investment – Evan’s equity	$446,000
Equity investment – Lili’s equity	$44,000
Dividend revenue	$2,440
Revenue from investment	$60,000

Step by step solution

Definition of Investment Income

The inflow of the benefits occurring from any amount invested in any asset or investment is known as investment income. Such benefits arise because of an increase in investment value or due to any revenue generated from the investment.

Posting into Investment Accounts and Investment Income Accounts

Equity investment – Evan’s equity
Date	Particulars	Amt $	Date	Particulars	Amt $
	Beginning balance	$400,000	15 Dec	Cash	$14,000
31 Dec	Revenue from investment	$60,000	31 Dec	Balance c/d	$446,000
		$460,000			$460,000

Equity investment – Lili’s equity
Date	Particulars	Amt $	Date	Particulars	Amt $
31 Dec	Balance c/d	$2,440	15 May	Cash	$2,440

		$2,440			$2,440

Dividend revenue
Date	Particulars	Amt $	Date	Particulars	Amt $
31 Dec	Balance c/d	$2,440	15 May	Cash	$2,440

		$2,440			$2,440

Revenue from investment - Evan
Date	Particulars	Amt $	Date	Particulars	Amt $
31 Dec	Balance c/d	$60,000	31 Dec	Equity investment	$60,000

		$60,000			$60,000

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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.
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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.

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Step by step solution

Definition of Investment Income

Posting into Investment Accounts and Investment Income Accounts

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