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Chapter 10: Q1CA (page 577)

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

Short Answer

Expert verified

Points of difference are:

  1. Reporting unrealized gains.
  2. Reporting on Balance Sheet.
  3. Holding Period.

Step by step solution

01

Definition of Long-Term Assets

The assets with a holding period of more than one year are known as long-term assets. These assets include plants, buildings, and machinery.

02

Difference between trading debt investment and available-for-sale debt investment

Reporting Unrealized Gains: The unrealized gains/losses generated from holding the trading debt investment are included in the net income of the business entity. While the unrealized gains/losses from available-for-sale debt securities are reported in the equity section as other comprehensive gains.

Reporting on Balance Sheet: Trading debt investment is always reported as a current asset on the balance sheet. While available for sale, debt investments are reported as current or long-term assets according to the intention of management.

Holding Period: Trading debt investments are held for a very short period, such as within days, months, or weeks. While the available-sale securities are held for a slightly longer period and are sold within one year.

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Most popular questions from this chapter

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite’s voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite’s current market value is \(51 per share.

31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements

Classify and prepare partial financial statements for Money Man’s 25% Technomite investment for the year ended December 31, 2018.

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

Journalize Peyton’s investment transactions. Explanations are not required.

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

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

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.

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.

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