Q.10-22PGB_3
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.
Step-by-Step Solution
VerifiedAnswer
Account | Balance |
Equity investment | $0 |
Trading debt investment | $40,000 |
The assets in the business entity trades to generate additional income are investment assets. These assets might be long-term or short-term.
| 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 |
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.