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Chapter 10: Q. 4SE_2 (page 567)

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鈥檚 investment in the Farrier stock during 2018.

Short Answer

Expert verified

Both sides of the journal totals $75,125.

Step by step solution

01

Definition of Cash Dividend

The cash is given as a reward to the shareholders from the profit generated by the business entity is known as acash dividend.

02

Journal Entries for Investment

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2018

Investment in Farrier Corporation

$60,000

Cash

$60,000

1 Aug 2018

Cash

$2,625

Investment in Farrier Corporation

$2,625

31 Dec 2018

Investment in Farrier

$12,500

Revenue from investment

$12,500

$75,125

$75,125

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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鈥檚 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.

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment.

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment.

31 Received Taylor鈥檚 annual report showing \(100,000 of net income.

31 Received Josh鈥檚 annual report showing \)620,000 of net income for the year.

31 Taylor鈥檚 stock fair value at year-end was \(620,000.

31 Josh鈥檚 common stock fair value at year-end was \)14 per share.

Requirements

Where is the unrealized holding gain or loss associated with the Josh stock reported?

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?

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

How much cash interest will Advance receive each year from FermaCo?

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets鈥� fair values.

Requirements

If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?
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