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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

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

What was the net effect of the investment on Josh’s net income for the year ended December 31, 2018?

Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements

1. How would the bond investment be classified on League Up’s December 31, 2018, balance sheet?

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

What account(s) and amount(s), if any, would be reported on Captain’s income statement for the year ended December 31, 2018?

Lee Co. reported the following items on its 2018 financial statements:

Total Assets, December 31, 2018

$10,000

Total Assets, December 31, 2017

15,000

For year ended December 31, 2018

Interest Expenses

150

Net income

850

Determine Lee’s rate of return on total assets for 2018.

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.

See all solutions

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