Q. 4SE_1 - Horngren'S Financial And Managerial Accounting

Question

Question: S10-4 Accounting for equity investments 

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements 

Identify what type of investment the Farrier stock is for Bryant.

Step-by-Step Solution

Answer

Bryant will report investment in Farrier as a significant influence - equity investment.

Step 1: Definition of Voting Stock

The stock of shares that will provide voting rights in the general meeting of the shareholders is known as voting stock. It includes the shares of the common stock.

Step 2: Type of Investment

Calculation of percentage of voting stock held by Bryant Inc:

$$\begin{gathered} Votingstock=\frac{Sharespurchased}{Totaloutstandingvotingstock}\times 100 \\ =\frac{3,750}{15,000}\times 100 \\ =25\% \end{gathered}$$

Voting stock falls between 20% to 50%. Therefore, Bryant will have significant influence over Farrier Inc.