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Chapter 10: Q.10-20PGA_4 (page 572)

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?

Short Answer

Expert verified

Answer

Liabilities and stockholder鈥檚 equity

Stockholder鈥檚 equity

Retained earnings

$4,000

Step by step solution

01

Definition of Retained Earnings

Retained earnings can be defined as the income of the business entity that is kept aside for future investment and distribution purposes.

02

Reporting Unrealized Holding Gains from Lili’s Stock

The unrealized holding gains will be included in the net income and will be reported in the equity section of the balance sheet. Net income is added to the retained earnings of the business entity

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Most popular questions from this chapter

Question: Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better. After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, 鈥淲e鈥檝e decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.鈥� Carl made the adjustments even though he doesn鈥檛 think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company鈥檚 travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?

On August 20, 2018, Mraz, Co. decides to invest excess cash of \(2,500 by purchasing Virginia, Inc. bonds. At year-end, December 31, 2018, the market price of the bonds was \)2,000. The investment is categorized as available-for-sale debt. Journalize the adjusting entry needed at December 31, 2018.

Where on the financial statements is an unrealized holding gain or loss on available-for-sale debt investments reported?

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鈥檚 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鈥檚 Phyflexon investment as of December 31, 2018.

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

2. Post transactions to T-accounts to determine December 31, 2018, balances related to the investment and investment income accounts.

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