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Chapter 10: Q1SE_1. (page 567)

S10-1 Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements

1. What are some reasons why Garden Haven may choose to invest in debt or equity securities?

Short Answer

Expert verified

Garden can invest in the securities because the excess cash can be utilized to generate income for at least four months.

Step by step solution

01

Definition of Dividend

The dividend is the share of profit provided to the shareholders or investors of the equity. Such dividend is decided by the board of directors of the company.

02

Reasons for Investing in Debt and Equity Securities

Garden may choose to invest in debt or equity securities because the company has excess cash available that will be needed after four months. Such excess cash can generate income from the securities, such as interest and dividends.

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Most popular questions from this chapter

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

Identify what type of investment the Farrier stock is for Bryant.

Accounting for debt investments

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin 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. Solomon intends to hold the Morin bond investment until maturity.

Requirements

1. Journalize Solomon Brothers’ transactions related to the bonds for 2018.

What is equity security?

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