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Chapter 10: Q15E_3 (page 571)

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?

Short Answer

Expert verified

The balance of the Investment account is$295,750,000.

Step by step solution

01

Definition of T-Accounts

T account can be defined as the specific account prepared by the business entity to record all the transactions of the respective account.

02

Posting Transactions into Investment Account

Investment Account

Date

Particulars

Amount $

Date

Particulars

Amount $

6 Jan 2018

Cash

$280,000,000

31 Dec 2018

Cash

$15,750,000

31 Dec 2018

Revenue from Investment

$31,500,000

31 Dec 2018

Balance c/d

$295,750,000

$311,500,000

$311,500,000

This balance will be classified as a long-term asset on the balance sheet.

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Most popular questions from this chapter

Question: P10-21B Accounting for debt investments

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Hale and Sons intends to hold the Tyson Way bond investment until maturity.

Requirements

2. Journalize the entry required on the Tyson Way bonds maturity date. (Assume the last interest payment has already been recorded.)

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned net income of \)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

1. What method should East Cost Motors use to account for the investment in Boxcar Motors? Give your reasoning.

Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements

1. How would the bond investment be classified on League Up’s December 31, 2018, balance sheet?

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

Where is the unrealized holding gain or loss associated with the trading debt investment reported?

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.
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