Question

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

4. Where is the unrealized holding gain or loss associated with the Lili stock reported?

Short answer

Answer

Liabilities and stockholder’s equity
Stockholder’s equity
Retained earnings		$4,000

Step-by-step solution

Definition of Retained Earnings

Retained earnings can be defined as the income of the business entity that is kept aside for future investment and distribution purposes.

Reporting Unrealized Holding Gains from Lili’s Stock

The unrealized holding gains will be included in the net income and will be reported in the equity section of the balance sheet. Net income is added to the retained earnings of the business entity