Q.10-23PGB_1 - Horngren'S Financial And Managerial Accounting

Question

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 

Journalize the transactions for the year of Text Source.

Step-by-Step Solution

Answer

Answer

Both sides of the journals total $113,450.

Step 1: Definition of Net Income

Net benefit generated during the fiscal year after adjusting all the sacrifices made is known as net income. It is also known as bottom-line profit.

Step 2: Journal Entries for the Year

Date	Accounts and Explanation	Debit $	Credit $
3 March	Equity Investment  - Josh	$65,000
	Cash		$65,000
15 May	Cash	$3,450
	Dividend revenue		$3,450
15 Dec	Cash	$20,000
	Equity investment - Taylor		$20,000
31 Dec	Equity investment – Taylor	$20,000
	Revenue from investment		$20,000
31 Dec	No journal entry was made for net income of equity investment without significant influence.
31 Dec	No Journal entry will be made because the balance is adjusted in entries of net income and dividend.
31 Dec	Fair value adjustment – Josh	$5,000
	Unrealized holding gains		$5,000
		$113,450	$113,450