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Chapter 10: Q16E_1 (page 571)

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.

Short Answer

Expert verified

Both sides of the journal totals$156,250.

Step by step solution

01

Definition of Market Value

The rate or value at which the asset can be sold or purchased in the market is known as market value. Such value is determined by market factors and forces.

02

Journal Entry of the Investment Transactions

Date

Accounts and Explanation

Debit $

Credit $

6 Dec 2018

Investment in equity2,500脳$24

$60,000

Cash

$60,000

23 Dec 2018

Cash2,500脳$1.5

$3,750

Dividend revenue

$3,750

31 Dec 2018

Unrealized holding loss 鈥� equity investment without significant influence2500脳$24-$11

$32,500

Fair value adjustment

$32,500

27 Jan 2019

Cash

45,500

Loss on Disposal

14,500

Investment in Equity

$60,000

$156,250

$156,250

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Most popular questions from this chapter

In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.

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

Journalize the transactions for the year of Text Source.

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?

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

Classify each of the investments made during 2018. (Assume the equity investments represent less than 20% of ownership of outstanding voting stock.)

Question: S10-7 Computing rate of return on total assets

Barot鈥檚 2018 financial statements reported the following items鈥攚ith 2017 figures given for comparison:

BAROT INC

Balance Sheet

As of December 31, 2018 and 2017

2018

2017

Total assets

\(32,978

\)30,660

Total liabilities

19,400

11,560

Total stockholder鈥檚 equity

13,578

19,100

Total liabilities and stockholder鈥檚 equity

\(32,978

\)30,660

Net income for 2018 was \(3,910, and interest expense was \)240. Compute Barot鈥檚 rate of return on total assets for 2018. (Round to the nearest percent.)
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