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Chapter 10: Q12E_3 (page 570)

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

Prepare a partial income statement for Strategic Investments for year ended December 31, 2018.

Short Answer

Expert verified

The partial net income is$3,808.

Step by step solution

01

Definition of Dividend Revenue

The revenue generated through investment in the company’s shares is known as dividend revenue. Such revenue is generated when the investee company distributes aportion of the profit to the investors.

02

Partial income statement

Particular

Amount $

Dividend revenue

192

Less: Unrealized holding loss

($4,000)

Net income

$3,808

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Most popular questions from this chapter

What is comprehensive income, and what does it include?

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

How much cash interest will Advance receive each year from FermaCo?

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

Journalize the 2018 transactions. Explanations are not required.

  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.

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

Journalize the transactions related to Bryant’s investment in the Farrier stock during 2018.

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