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Chapter 10: Q.10-23PGB_4 (page 574)

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?

Short Answer

Expert verified

Answer

The equity section of the balance sheet will report the unrealized holding gains on the equity security.

Step by step solution

01

Definition of Fair Value

The price of any asset established by the willingness of both buyer and seller is known as fair value. Marketable securities are reported in thebalance sheet at their fair value only.

02

Reporting Unrealized Holding gains

Unrealized holding gains will be reported in the equity section of the balance sheet because they are added to the net income calculation.

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Most popular questions from this chapter

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

What type of information in the financial reports would have helped the bank detect this reclassification?

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

1. Journalize Strategic鈥檚 investment transactions. Explanations are not required.

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements

2. In what category and at what value would Bell report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Grant鈥檚 bond be reported, if at all?

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

1. What would the effect be to stakeholders if such losses were not reported in a timely way?

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.

See all solutions

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