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Chapter 10: Q. 7RQ (page 566)

What method is used for investments in equity securities when the investor has significant influence and typically 20% to 50% ownership? Briefly describe how dividends declared and received and share of net income are reported.

Short Answer

Expert verified

When the investor has ownership between 20% to 50%, the equity method is used for accounting purposes. Declaration of dividends will decrease the investment while net income increases the investment value.

Step by step solution

01

Definition of Net income

After adjusting all the sacrifices made, the benefits calculated for the business entity are known as net income. It includesadjustment of tax expensesas well.

02

Accounting for investment

The investor has significant influence over the business entity and has ownership of 20% to 50%; therefore,the equity method will be used for accounting for such investment.

Under Equity accounting:

  1. Declaration and receipt of dividends will reduce the investment value.
  2. Share of net income will increase the investment value.

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Most popular questions from this chapter

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鈥檚 annual report showing \(300,000 of net income.

31 Received Lili鈥檚 annual report showing \)120,000 of net income for the year.

31 Evan鈥檚 stock fair value at year-end was \(390,000.

31 Lili鈥檚 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?

Accounting for debt investments

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Solomon intends to hold the Morin bond investment until maturity.

Requirements

Journalize the entry required on the Morin bonds maturity date. (Assume the last interest payment has already been recorded.)

Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018

Jan. 5 Purchased Vedder Company鈥檚 \(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鈥檚 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

Prepare a comprehensive income statement for Peyton Investments for year ended December 31, 2018. Assume net income was $200,000.

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh鈥檚 Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit鈥檚 bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

In what category and at what value would Josh report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Jackrabbit鈥檚 stock be reported, if at all?

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

Where is the unrealized holding gain or loss associated with the trading debt investment reported?
See all solutions

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