Question

1. 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.

Short answer

Answer

Accounts	Balances
Equity investment – Taylor	$700,000
Equity investment – Josh	$65,000
Dividend revenue	$3,450
Revenue from investment	$20,000

Step-by-step solution

Definition of Return on Investment

A metric used by the analyst to evaluate the performance of any investment is known as return on investment. It is a determinant of the profitability of the investment.

Posting into Investment Accounts and Investment Income Accounts

Equity investment – Taylor
Date	Particulars	Amt $	Date	Particulars	Amt $
	Beginning balance	$700,000	15 Dec	Cash	$20,000
31 Dec	Revenue from investment	$20,000	31 Dec	Balance c/d	$700,000
		$720,000			$720,000

Equity investment – Josh
Date	Particulars	Amt $	Date	Particulars	Amt $
3 March	Cash	$65,000	31 Dec	Balance c/d	$65,000
		$65,000			$65,000

Dividend revenue
Date	Particulars	Amt $	Date	Particulars	Amt $
31 Dec	Balance c/d	$3,450	15 May	Cash	$3,450
		$3,450			$3,450

Revenue from investment - Taylor
Date	Particulars	Amt $	Date	Particulars	Amt $
31 Dec	Balance c/d	$20,000	31 Dec	Equity investment	$20,000
		$20,000			$20,000