Question

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share.

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet.

31 Adjusted the Violet bond to its market value of \)22,000.

Requirements

1. Classify each of the investments made during 2018. (Assume the equity investments represent less than 20% of the ownership of outstanding voting stock.)

Short answer

Both investments will be classified as current assets because they are acquired for a short period.

Step-by-step solution

Definition of Outstanding Stock

The stock of the shares still in possession of the stockholders is known as outstanding stock. This value is used as a determinant of earnings per share.

Classification of Each Investment

1. The investment made in Pogo, Inc will be considered as an Equity investment under current assets because the company intends to sell it within three months.

2. The investment made in the bond will be reported as trading debt investment in the current asset section.