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Chapter 10: Q3SE_2 (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

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

Short Answer

Expert verified

The net income of the business entity will increase by$850.

Step by step solution

01

Definition of Equity Investment

The amount of money engaged in acquiring the shares of any company is reported as an equity investment on the balance sheet.

02

Net Effect on the Net income for the Year 2018

Particular

Amount $

Dividend

$400

Add: Gain on sale

$450

Increase in net income

$850

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Most popular questions from this chapter

How are held-to-maturity debt investments reported on the financial statements?

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock.

Dec. 31 Adjusted the investment to its current market value of \(45 per share.

31 Phyflexon reported net income of \)330,000 for the year ended 2018.

Requirements

2. Classify and prepare a partial balance sheet for Strategic’s Phyflexon investment as of December 31, 2018.

Question: S10-7 Computing rate of return on total assets

Barot’s 2018 financial statements reported the following items—with 2017 figures given for comparison:

BAROT INC

Balance Sheet

As of December 31, 2018 and 2017

2018

2017

Total assets

\(32,978

\)30,660

Total liabilities

19,400

11,560

Total stockholder’s equity

13,578

19,100

Total liabilities and stockholder’s equity

\(32,978

\)30,660

Net income for 2018 was \(3,910, and interest expense was \)240. Compute Barot’s rate of return on total assets for 2018. (Round to the nearest percent.)

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.

Question: E10-11 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

Journalize Peyton’s investment transactions. Explanations are not required.

See all solutions

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