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Chapter 10: Q13E_1 (page 570)

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

Journalize the entries for 2018. Explanations are not required.

Short Answer

Expert verified

Both sides of the Journal total$11,656.

Step by step solution

01

Definition of Voting Rights

The rights possessed by the common shareholders of the business entity are known as voting rights. The preferred shareholders do not possess such rights because they are not considered owners of the business.

02

Journal Entry for Transactions

Date

Accounts and Explanation

Debit $

Credit $

14 Jan 2018

Equity investment

$10,600

Cash

$10,600

22 Aug 2018

Cash

$56

Dividend revenue

$56

31 Dec 2018

Fair value adjustment

$1,000

Unrealized holding gains

$1,000

No Journal entry is made for undistributed net income.

$11,656

$11,656

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Most popular questions from this chapter

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

1. Journalize the transactions for the year of Waterfall Source.

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share.

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet.

31 Adjusted the Violet bond to its market value of \)22,000.

Requirements

Journalize the 2018 transactions. Explanations are not required.

On August 20, 2018, Mraz, Co. decides to invest excess cash of \(2,500 by purchasing Virginia, Inc. bonds. At year-end, December 31, 2018, the market price of the bonds was \)2,000. The investment is categorized as available-for-sale debt. Journalize the adjusting entry needed at December 31, 2018.

In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months, when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share.

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet.

31 Adjusted the Violet bond to its market value of \)22,000.

Requirements

Prepare T-accounts for the investment assets, and show how to report the investments on Jetway’s balance sheet at December 31, 2018.

See all solutions

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