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Chapter 10: Q3SE_1 (page 567)

Accounting for equity investments

On January 1, 2018, Bark Company invests \(10,000 in Roots, Inc. stock. Roots pays Bark a \)400 dividend on August 1, 2018. Bark sells the Roots’s stock on August 31, 2018, for $10,450. Assume the investment is categorized as a short-term equity investment and Bark Company does not have significant influence over Roots, Inc.

Requirements

1. Journalize the transactions for Bark’s investment in Roots’s stock.

Short Answer

Expert verified

Both sides of the journal totals$20,850.

Step by step solution

01

Definition of Dividend Revenue


The revenue generated through dividends provided by the company to its shareholders is known as dividend revenue.

02

Journal Entry for Transaction of Investment

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2018

Equity Investment

$10,000

Cash

$10,000

1 Aug 2018

Cash

$400

Dividend revenue

$400

31 Aug 2018

Cash

$10,450

Equity investment

$10,000

Gain on sale of equity investment

$450

$20,850

$20,850

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Most popular questions from this chapter

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 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.

Accounting for debt investments

Griffin purchased a bond on January 1, 2018, for \(140,000. The bond has a face value of \)140,000 and matures in 20 years. The bond pays interest on June 30 and December 31 at a 3% annual rate. Griffin plans on holding the investment until maturity.

Requirements

1. Journalize the 2018 transactions related to Griffin’s bond investment. 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.

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