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Chapter 10: Q14E_2 (page 570)

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite鈥檚 voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite鈥檚 current market value is \(51 per share.

31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements

Classify and prepare partial financial statements for Money Man鈥檚 25% Technomite investment for the year ended December 31, 2018.

Short Answer

Expert verified

The investment will be reported as a long-term investmentin the company鈥檚 balance sheet.

Step by step solution

01

Definition of Financial Statements

All statements concerned with reporting a summary of all the financial transactions are known as financial statements. It reports an overview of all the transactions occurring during the year.

02

Partial Financial Statement

Balance sheet:

Particular

Amount

Assets

Long-Term Investment

Investment in Technomite stock

$65,292

Equity

Other comprehensive Gains/Losses

($2,000)

Income Statement:

Particular

Amount $

Revenue from investment

$45,000

Working Note:

Particular

Amount

Initial investment

$22,400

Less: Dividend payment

(108)

Less: Unrealized holding losses

(2,000)

Add: Increase in investment due to net income

45,000

Fair value of Investment

$65,292

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Most popular questions from this chapter

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

Determine the effect on Canyon Canoe Company鈥檚 net income for the year for each of the three investments.

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

Journalize the 2018 transactions. Explanations are not required.

What does the rate of return on total assets measure, and how is it calculated?

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?
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