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Chapter 10: Q15E_3 (page 571)

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?

Short Answer

Expert verified

The balance of the Investment account is$295,750,000.

Step by step solution

01

Definition of T-Accounts

T account can be defined as the specific account prepared by the business entity to record all the transactions of the respective account.

02

Posting Transactions into Investment Account

Investment Account

Date

Particulars

Amount $

Date

Particulars

Amount $

6 Jan 2018

Cash

$280,000,000

31 Dec 2018

Cash

$15,750,000

31 Dec 2018

Revenue from Investment

$31,500,000

31 Dec 2018

Balance c/d

$295,750,000

$311,500,000

$311,500,000

This balance will be classified as a long-term asset on the balance sheet.

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Most popular questions from this chapter

What method is used for investments in equity securities when the investor has significant influence and typically 20% to 50% ownership? Briefly describe how dividends declared and received and share of net income are reported.

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.

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh鈥檚 Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit鈥檚 bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

What was the net effect of the investment on Josh鈥檚 net income for the year ended December 31, 2018?

Match the key term to the scenario.

1. Available-for-sale debt investments.

a. Jane owns 53% of Richard鈥檚 Roses鈥檚 voting stock.

2. Controlling interest equity investments.

b. Joe owns debt security in Bones, Inc. and intends to hold it until maturity.

3. Trading debt investments.

c. Jeannie owns a debt security in Cricket, Inc. and plans on selling the debt after one year.

4. Held-to-maturity debt investments.

d. Jimenez owns 5% of Delgado, Inc.鈥檚 voting stock but does not have the ability to participate in the decisions of Delgado, Inc.

5. Significant influence on equity investments.

e. Jacob owns 24% of Pay, Inc.鈥檚 voting stock and has the ability to exert influence over Pay, Inc.

6. No significant influence on equity investments.

f. Jim owns a debt security in Tag, Inc.鈥檚 and plans on holding the debt for only a week.

How are held-to-maturity debt investments reported on the financial statements?
See all solutions

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