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Chapter 10: Q. 5SE_1 (page 568)

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
1. Journalize the transactions for Bell’s investment in Grant, Inc. for 2018.

Short Answer

Expert verified

Both sides of the journal totals $19,600.

Step by step solution

01

Definition of Unrealized Gains

The increase in the asset’s value that is still in possession of the business entity or individual is known as unrealized gain. It is reported as anothercomprehensive income.

02

Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
1 Feb 2018	Trading debt investment	$16,800
	Cash		$16,800

31 Dec 2018	Fair value adjustment – Trading debt	$2,800
	Unrealized holding gains		$2,800
		$19,600	$19,600

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Most popular questions from this chapter

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

Journalize the 2018 transactions. Explanations are not required.

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment.

Dec. 15 Received a cash dividend of \)70,000 from Evan investment.

31 Received Evan’s annual report showing \(300,000 of net income.

31 Received Lili’s annual report showing \)120,000 of net income for the year.

31 Evan’s stock fair value at year-end was \(390,000.

31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements

1. Journalize the transactions for the year of Waterfall Source.

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’s annual report showing \(100,000 of net income.

31 Received Josh’s annual report showing \)620,000 of net income for the year.

31 Taylor’s stock fair value at year-end was \(620,000.

31 Josh’s common stock fair value at year-end was \)14 per share.

Requirements

Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts.

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

3. In what category and value would Bryant report the investment on the December 31, 2018, balance sheet?

S10-1 Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements

1. What are some reasons why Garden Haven may choose to invest in debt or equity securities?

See all solutions

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