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Chapter 10: Q3RQ. (page 566)
Why would a company invest in debt or equity securities?
Investment is made in debt and equity securitiesto generate benefits from excess cash and achieve goals.
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What does the rate of return on total assets measure, and how is it calculated?
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
4. Where is the unrealized holding gain or loss associated with the Lili stock reported?
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
Journalize the 2018 transactions. Explanations are not required.
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
On December 31, 2018, how would the Loveable stock be classified and at what value would it be reported on the balance sheet?
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
What type of classification would Garden Haven’s investment fall within—short-term or long-term? Why?
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