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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: 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

Journalize the 2018 transactions. Explanations are not required.

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements

1. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

Journalize the transactions for Josh’s investment in Jackrabbit, Inc. for 2018.

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

Prepare a comprehensive income statement for Peyton Investments for year ended December 31, 2018. Assume net income was $200,000.

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

Journalize the transactions related to Bryant’s investment in the Farrier stock during 2018.

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