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Chapter 10: Q.10-22PGB_2 (page 573)

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

Journalize the 2018 transactions. Explanations are not required.

Short Answer

Expert verified

Answer

Both sides of the journal total$158,420.

Step by step solution

01

Definition of Trading Securities

The securities that were purchased with the primary motive of generating a profit by selling them over a short period are known as trading securities. These securities provide benefits when their value increases.

02

Journal Entries for Transactions of 2018

Date

Accounts and Explanation

Debit $

Credit $

2 July 2018

Equity investment

$54,600

Cash

$54,600

21 Aug 2018

Cash

$1,680

Dividend revenue

$1,680

16 Sep 2018

Cash

$57,540

Equity investment

$54,600

Gain on disposal

$2,940

1 Oct 2018

Trading debt investment

$40,000

Cash

$40,000

31 Dec 2018

Cash

$600

Interest revenue

$600

31 Dec 2018

Fair value adjustment 鈥� trading debt

$4,000

Unrealized holding gains

$4,000

$158,420

$158,420

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Most popular questions from this chapter

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鈥檚 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鈥檚 net income for the year ended December 31, 2018?

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer鈥檚 balance sheet at December 31, 2018.

Question: P10-25 Accounting for debt and equity investments

This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.

Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe.

7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison.

10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31.

Sep. 30 Received dividends of \)0.15 per share from Adobe.

Nov. 1 Received dividends of \(0.30 per share from Bison.

Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes.

31 Bison Backpacks reported net income of \(30,000 for the year.

31 Adjusted the Adobe stock for a market value of \)2.98 per share.

Requirements

1. Journalize the transactions including any entries, if required, at December 31, 2019.

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)

Requirements

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

Computing rate of return on total assets

Montane Exploration Company reported these figures for 2018 and 2017:

Income statement: Partial

2018

2017

Interest expenses

\(16,700,000

\)16,500,000

Net income

16,900,000

20,200,000

Balance sheet: Partial

Dec 31, 2018

Dec 31, 2017

Total assets

\(316,000,000

\)420,000,000

Compute the rate of return on total assets for 2018. (Round to two decimals.)
See all solutions

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