Question

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)

Requirements

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

Short answer

The balance of the Investment account is$295,750,000.

Step-by-step solution

Definition of T-Accounts

T account can be defined as the specific account prepared by the business entity to record all the transactions of the respective account.

Posting Transactions into Investment Account

Investment Account
Date	Particulars	Amount $	Date	Particulars	Amount $
6 Jan 2018	Cash	$280,000,000	31 Dec 2018	Cash	$15,750,000
31 Dec 2018	Revenue from Investment	$31,500,000	31 Dec 2018	Balance c/d	$295,750,000
		$311,500,000			$311,500,000

This balance will be classified as a long-term asset on the balance sheet.