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Chapter 10: Q.10-22PGB_4 (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

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

Short Answer

Expert verified

Answer

Unrealized holding gains related to trading debt will bereported in the equity section of the balance sheet

Step by step solution

01

Definition of Equity Section

The section of the balance sheet that includes all the capital investments made by the business entity owners is known as the equity section.

02

Reporting Unrealized Holding Gains Associated with Trading Debt

The business entity will add unrealized holding gain of trading debt to the net income of the business entity, and net income is included in the retained earnings, which is reported as stockholders鈥� equity.

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Most popular questions from this chapter

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

Identify what type of investment the Farrier stock is for Bryant.

Accounting for debt investments

On January 1, 2018, the Chaucer鈥檚 Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer鈥檚 intends to hold the bonds until December 31, 2023.

Requirements

1. Journalize the transactions related to Chaucer鈥檚 investment in Lake Turner bonds during 2018.

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

1. Journalize the transactions for Bark鈥檚 investment in Roots鈥檚 stock.

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

1. Journalize Boston Today鈥檚 investment transactions. Explanations are not required.

Lee Co. reported the following items on its 2018 financial statements:

Total Assets, December 31, 2018

$10,000

Total Assets, December 31, 2017

15,000

For year ended December 31, 2018

Interest Expenses

150

Net income

850

Determine Lee鈥檚 rate of return on total assets for 2018.
See all solutions

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