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Chapter 10: Q16E_1 (page 571)

Classifying and accounting for equity investments

Boston Today Publishers completed the following investment transactions during 2018 and 2019:

2018

Dec. 6 Purchased 2,500 shares of Loveable stock at a price of \(24.00 per share, intending to sell the investment next month. Boston did not have significant influence over Loveable.

23. Received a cash dividend of \)1.50 per share on the Loveable stock.

31. Adjusted the investment to its market value of \(11.00 per share.

2019

Jan. 27 Sold the Loveable stock for \)18.20 per share.

Requirements

1. Journalize Boston Today’s investment transactions. Explanations are not required.

Short Answer

Expert verified

Both sides of the journal totals$156,250.

Step by step solution

01

Definition of Market Value

The rate or value at which the asset can be sold or purchased in the market is known as market value. Such value is determined by market factors and forces.

02

Journal Entry of the Investment Transactions

Date

Accounts and Explanation

Debit $

Credit $

6 Dec 2018

Investment in equity2,500×$24

$60,000

Cash

$60,000

23 Dec 2018

Cash2,500×$1.5

$3,750

Dividend revenue

$3,750

31 Dec 2018

Unrealized holding loss – equity investment without significant influence2500×$24-$11

$32,500

Fair value adjustment

$32,500

27 Jan 2019

Cash

45,500

Loss on Disposal

14,500

Investment in Equity

$60,000

$156,250

$156,250

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Most popular questions from this chapter

Match the key term to the scenario.

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.

4. Held-to-maturity debt investments.

d. Jimenez owns 5% of Delgado, Inc.’s voting stock but does not have the ability to participate in the decisions of Delgado, Inc.

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.

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.

On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation’s investment in Small Town bonds during 2018.

Question: Where on the financial statements is an unrealized holding gain or loss on trading debt investments reported?

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

2. Prepare a partial balance sheet for Peyton’s Vedder investment as of December 31, 2018.

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