Question

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

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer’s balance sheet at December 31, 2018.

Short answer

Answer

Account	Balance
Equity investment	$0
Trading debt investment	$40,000

Step-by-step solution

Definition of Investment Assets

The assets in the business entity trades to generate additional income are investment assets. These assets might be long-term or short-term.

T-Accounts for the Investment Assets

Equity Investment
Date	Particular	Amt $	Date	Particular	Amt $
2 July 2018	Cash	$54,600	16 Sep 2018	Cash	$54,600
		$54,600			$54,600

Trading debt Investment
Date	Particular	Amt $	Date	Particular	Amt $
1 Oct 2018	Cash	$40,000	31 Dec 2018	Balance c/d	$40,000
		$40,000			$40,000

Reporting Trading Debt in Balance sheet

Particular	Amount $
Trading debt investment	$40,000
Add: unrealized holding gains	$4,000
Net investment	$44,000
Stockholder’s equity
Retained earnings/Unrealized holding gains	$4,000

Note: Unrealized holding will be included in net income, and net income is added to the retained earnings calculation.